Monetary and Fiscal Policy

8 questions

1. 1. Which of the following statements about the quantity theory of money is TRUE?
   The equation of exchange is MV = PQThe classical economists assumed that V would rise when real interest rates rise.The classical economists concluded that increases in the money supply cause increases in real GDP and nothing else.
2. 2. In the liquidity trap, the money demand curve is:
   VerticalHorizontalNegatively sloped
3. 3. We have the following information:

   • Nominal GDP: $5 trillion

   • Money supply is 1 trillion

   According to quantity theory of money, calculate the velocity of money supply

   0.25Cannot be determined
4. 4. Assume that the Fed increases the monetary base by $1 billion. The reserve requirement is 1/7. As a result, the money supply will:
   Increase by $1 billionIncrease by $7 billionDecrease by $7 billion
5. 5. A contractionary monetary policy:
   Increases the equilibrium rate of interestDecreases the equilibrium rate of interestIncreases the money supply
6. 6. Which of the following actions is an example of expansionary fiscal policy?
   A decrease in welfare paymentsA purchase of government securities in the open market A decrease in the corporate profits tax rates
7. 7. The sale of government securities by the Fed is predicted to:
   Decrease reserves, and eventually lead to an expansion of the money supply.Decrease reserves, and eventually cause a contraction of the money supply.Increase reserves, and eventually cause a contraction of the money supply.
8. 8. Consider a situation where there is tight monetary policy and loose fiscal policy. This will lead to:
   Higher interest rates and lower share of private sector in GDPHigher interest rates and higher share of private sector in GDPLower interest rates and lower share of private sector in GDP