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Chapter 19: Q4. (page 405)

If the money supply fell by 10 per cent, a monetarist would expect nominal GDP to __________.

a. rise

b. fall

c. stay the same

Short Answer

Expert verified

The correct option is (b): fall.

Step by step solution

01

Explanation

According to the monetarists, the change in money supply is directly proportional to the change in nominal GDP. It means that if the money supply increases (decreases), the nominal GDP will increase (decrease). In the question, the money supply is decreasing. Hence, the monetarist would expect the nominal GDP also to fall.

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Most popular questions from this chapter

Suppose that the money supply is \(1 trillion and money velocity is 4. Then the equation of exchange would predict nominal GDP to be:

a. \)1 trillion.

b. \(4 trillion.

c. \)5 trillion.

d. $8 trillion

Place 鈥淢ON,鈥� 鈥淩ET,鈥� or 鈥淢AIN鈥� beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively:

a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.

b. Downward wage inflexibility means that declines in aggregate demand can cause a long-lasting recession.

c. Changes in the money supply M increase PQ; at first only Q rises, because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.

d. Fiscal and monetary policies smooth out the business cycle.

e. The Fed should increase the money supply at a fixed annual rate.

Assume the following information for a hypothetical economy in year 1: money supply = $400 billion; long-term annual growth of potential GDP = 3 percent; velocity = 4. Assume that the banking system initially has no excess reserves and that the reserve requirement is 10 percent. Also suppose that velocity is constant and that the economy initially is operating at its full-employment real output.

  1. What is the level of nominal GDP in year 1?

  2. Suppose the Fed adheres to a monetary rule through open-market operations. What amount of U.S. securities will it have to sell to, or buy from, banks or the public between years 1 and 2 to meet its monetary rule?

Briefly describe the difference between a so-called real business cycle and a more traditional 鈥渟pending鈥� business cycle.

What is an efficiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?
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