Chapter 22

The Classical Foundations

D1Factual
1. The two cornerstones of Classical economics are the Quantity Theory and A) Liquidity Preference Theory. B) disequilibrium analysis. C) Say s Law. !) the Philli"s Cur#e. Answer$ C

D1Factual
%. Say s law A) e&"lains the role of money. B) deals with interest rates' em"loyment' and "roduction. C) was acce"ted and "raised by (ohn )aynard *eynes. !) +one of the abo#e Answer$ B

D1Factual
,. The ori-ins of modern monetarism lie in the wor. of the A) Classical economists. B) *eynesians. C) )althusians. !) )ercantilists. Answer$ A

D2Factual
/. Accordin- to Say s law A) the economy will suffer from underem"loyment when total s"endin- is insufficient to 0ustify "roduction at full em"loyment. B) the economy will ne#er suffer from unem"loyment or underconsum"tion. C) money is neutral with res"ect to the real sector of the economy. !) the "roduction function defines the total demand for -oods and ser#ices. Answer$ B

41itter2Silber23dell Money, Banking, and Financial Markets ' 4le#enth 4dition

D2Interpretive
5. 6hich of the followin- statements is inconsistent with Say s Law7 A) The economy has fle&ible wa-es and "rices. B) The economy will "roduces at the full em"loyment le#el of out"ut. C) The economy has an en#ironment of 8laisse9 faire.: !) The economy s le#el of sa#in- de"ends solely on the le#el of income. Answer$ !

D2Factual
;. <n the Classical interest theory' sa#in- and in#estment determine A) the "rice le#el. B) unem"loyment. C) the money su""ly. !) interest rates. Answer$ !

D2Interpretive
=. Accordin- to Classical interest rate theory' fallin- interest rates will A) increase the demand for money. B) decrease the demand for money. C) decrease in#estment e&"enditures. !) decrease the sa#in- rate. Answer$ !

D2Factual
>. <n the Classical #iew' risin- interest rates reduce A) -o#ernment s"endin-. B) sa#in-. C) #elocity. !) in#estment. Answer$ !

D2Factual
?. <n the Classical #iew' fallin- interest rates increase A) -o#ernment s"endin-. B) sa#in-. C) #elocity. !) in#estment. Answer$ B

D2Interpretive
1@. Accordin- to Classical interest rate theory' risin- interest rates will A) increase the demand for money. B) decrease the demand for money. C) increase in#estment e&"enditures. !) increase the sa#in- rate. Answer$ !

Cha"ter %%The Classical Aoundations5

D2Interpretive
11. Accordin- to Classical interest rate theory' which of the followin- will increase the equilibrium interest rate7 A) A decrease in in#estment B) A decrease in sa#inC) An increase in money demand !) A decrease in money demand Answer$ B

D2Interpretive
1%. Accordin- to Classical interest rate theory' which of the followin- will increase the equilibrium interest rate7 A) An increase in in#estment B) An increase in sa#inC) An increase in real out"ut !) A decrease in real out"ut Answer$ B

D3Factual
1,. The function of the interest rate in the Classical model was to .ee" the economy at full em"loyment equilibrium by assurin- that A) actual sa#in- equaled actual in#estment. B) actual sa#in- equaled desired in#estment. C) desired sa#in- equaled desired in#estment. !) desired sa#in- equaled actual in#estment. Answer$ A

D2Interpretive
1/. <n the Classical model' an increase in sa#in- will result in sa#in- bein- BBBBBBBBBBBBBBBBBB than in#estment which will cause the interest rate to . A) -reaterC rise B) -reaterC fall C) lessC rise !) lessC fall Answer$ B

D2Interpretive
15. <n the Classical model' a decrease in sa#in- will result in sa#in- bein- BBBBBBBBBBBBBBBBBB than in#estment which will cause the interest rate to . A) -reaterC rise B) -reaterC fall C) lessC rise !) lessC fall Answer$ C

61itter2Silber23dell Money, Banking, and Financial Markets ' 4le#enth 4dition

D2Factual
1;. <n the #iew of the Classical economists' risin- a--re-ate demand leads to A) lower unem"loyment. B) inflation. C) hi-her unem"loyment. !) deflation. Answer$ B

D2Factual
1=. <n the #iew of the Classical economists' a decrease in a--re-ate demand leads to A) lower out"ut le#els. B) a hi-her "rice le#el. C) hi-her out"ut le#els. !) a lower "rice le#el. Answer$ B

D2Factual
1>. <n the Classical #iew' the money su""ly determines A) interest rates. B) the sa#in- rate. C) a--re-ate su""ly. !) the "rice le#el. Answer$ !

D2Factual
1?. <n the Classical system' the interest rate is determined by all of the followin- e&ce"t A) the thriftiness of the "ublic. B) the money su""ly. C) the "roducti#ity of ca"ital. !) in#estment. Answer$ B

D2Factual
%@. <n the Classical system' the total out"ut of -oods and ser#ices and total em"loyment are determined by all of the followin- e&ce"t A) the interest rate. B) the labor force. C) the su""ly of ca"ital. !) e&istin- technolo-y. Answer$ A

D2Interpretive
%1. )oney neutrality im"lies that chan-es in the money su""ly ha#e an im"act on A) the unem"loyment rate. B) interest rates. C) the "rice le#el. !) real D!P. Answer$ C

Cha"ter %%The Classical Aoundations7

D1Factual
%%. 6hich of the followin- is not a factor in the equation of e&chan-e7 A) )oney #elocity B) )oney su""ly C) The "rice le#el !) +ominal income Answer$ !

D2Interpretive
%,. 3nder the Cambrid-e cash balance a""roach' money demand is determined by A) nominal income. B) real income. C) the sa#in- rate. !) #elocity. Answer$ A

D2Applied
%/. <f #elocity and out"ut are fi&ed at 5 and /@@' res"ecti#ely' and the "rice le#el is %' then the money su""ly is A) /'@@@. B) %@@. C) 1;@. !) /@. Answer$ C

D2Applied
%5. The "rice le#el is ,' total out"ut is 5@@' and the money su""ly is %@@. The #elocity of money is A) =.5. B) %.5. C) %.@. !) +one of the abo#e Answer$ A

D2Applied
%;. <f the total out"ut is ,@@' the #elocity of money is 5' and the money su""ly is ;@@' then the "rice le#el is A) 1@.@. B) %.@. C) %.5@. !) 5.@. Answer$ A

81itter2Silber23dell Money, Banking, and Financial Markets ' 4le#enth 4dition

D2Applied
%=. 3sin- the cash balance a""roach with . E 12% and D!P equal to F;@@ billion' cash balances must be equal to A) F1%@@ billion. B) F;@@ billion. C) F,@@ billion. !) )ore information is needed to answer this question. Answer$ C

D3Applied
%>. 3sin- the cash balance #ersion of the quantity theory with . E .%' an increase in the money su""ly of F1@@ billion leads to an increase in D!P of A) F5@@ billion. B) F1@@ billion. C) F5@ billion. !) F%@ billion. Answer$ A

D3Applied
%?. <n the Cambrid-e a""roach' if . is .5' total out"ut is F5@ billion' and the money su""ly is F1@@ billion' the "rice le#el is A) @.5. B) /.@. C) ,.@. !) 1@.@. Answer$ B

D1Factual
,@. <n the Classical model' the a--re-ate su""ly cur#e determines the A) "rice le#el. B) inflation rate. C) le#el of out"ut. !) money su""ly. Answer$ C

D2Factual
,1. <n the Classical model' the "rice le#el is determined by A) a--re-ate su""ly. B) the le#el of out"ut. C) the Cambrid-e .. !) a--re-ate demand. Answer$ !

Cha"ter %%The Classical Aoundations9

D2Interpretive
,%. <f the equation of e&chan-e holds' and if the #elocity of money and total out"ut are fi&ed' then' if the money su""ly doubles' A) the "rice le#el will increase by half. B) the "rice le#el will decrease by half. C) the "rice le#el will double. !) the "rice le#el will decrease by %5 "ercent. Answer$ C

D2Factual
,,. 6hich of the followin- is assumed constant in the shortGrun Classical model7 A) )oney su""ly B) Hut"ut C) A--re-ate demand !) 6a-es Answer$ B

D1Factual
,/. The #elocity of money is assumed to be constant in the Classical model because A) the "ayment habits of the community. B) fi&ed le#el of real D!P. C) the demand for money #aries with the le#el of real out"ut. !) a--re-ate demand is constant. Answer$ A

D2Factual
,5. 6hich of the followin- ensures full em"loyment in the Classical model7 A) 6a-e and "rice fle&ibility B) The equation of e&chan-e C) <n#entory ad0ustment !) Constant #elocity Answer$ A

D1Factual
,;. <n the Classical model' a--re-ate demand determines the A) le#el of real out"ut. B) the le#el of em"loyment. C) the "rice le#el. !) the #elocity of money. Answer$ C

D2Interpretive
,=. An increase in a--re-ate demand in the Classical model causes the "rice le#el to A) rise but out"ut remains constant. B) fall but out"ut remains constant. C) rise but out"ut to fall. !) fall but out"ut to rise. Answer$ A

101itter2Silber23dell Money, Banking, and Financial Markets ' 4le#enth 4dition

D2Interpretive
,>. A decrease in a--re-ate demand in the Classical model leads to A) lower "rices and lower out"ut. B) lower "rices and hi-her out"ut. C) lower "rices and unchan-ed out"ut. !) unchan-ed "rices and out"ut. Answer$ C

D1Factual
,?. <n the Classical #iew' inflation is the result of A) e&cessi#e monetary -rowth. B) s"eculation. C) -o#ernment s"endin-. !) natural disasters. Answer$ A

D2Interpretive
/@. The Cambrid-e . is all of the followin- e&ce"t A) the reci"rocal of the income #elocity of money. B) a transactions demand for money. C) the fraction of D!P that "eo"le wish to hold in the form of money balances. !) the #elocity of money. Answer$ !

D2Interpretive
/1. <n the Cambrid-e #ersion of the Quantity Theory of )oney' the amount of real money balances BBBBBBBBBBBBBBBBBB after an increase in the nominal money su""ly. A) increases B) decreases C) is unchan-ed !) Cannot be determined from the information -i#en Answer$ !

D1Applied
/%. <f the inflation rate is 5 "ercent and the real rate of interest is , "ercent' the nominal interest rate is A) > "ercent. B) 5 "ercent. C) , "ercent. !) % "ercent. Answer$ A

Cha"ter %%The Classical Aoundations 11

D2Applied
/,. Assumin- a nominal interest rate of ; "ercent' an unem"loyment rate of / "ercent' and an inflation rate of % "ercent' the real interest rate is a""ro&imately A) % "ercent. B) / "ercent. C) ; "ercent. !) > "ercent. Answer$ B

D1Factual
//. Classical economists and modern monetarists a-ree that the best way to e&amine the economy is throu-h the use of A) a--re-ate su""ly and demand. B) the multi"lier. C) the quantity theory. !) the D+P account. Answer$ C

D2Factual
/5. )odern )onetarists ar-ue that the #elocity of money is A) constant. B) the in#erse of the money multi"lier. C) unmeasurable. !) "redictable. Answer$ !

D2Factual
/;. )odern monetarists #iew any increases or decreases in total out"ut stemmin- from e&"ansions or contractions in the money su""ly as A) "ermanent. B) tem"orary. C) irrele#ant. !) e&tremely im"ortant. Answer$ B

D2Factual
/=. The Dreat !e"ression is thou-ht to ha#e been "rolon-ed and made dee"er by A) contraction of the money su""ly. B) the stoc. mar.et crash. C) s"eculati#e beha#ior of in#estors. !) ra"id inflation. Answer$ A

121itter2Silber23dell Money, Banking, and Financial Markets ' 4le#enth 4dition

D1Factual
/>. )onetarists differ from Classical economists in that they ar-ue that A) chan-es in the money su""ly affect only the "rice le#el in the lon- run. B) #elocity is not fi&ed but is "redictable. C) the economy tends to be stable around full em"loyment. !) the demand for money is a fi&ed fraction of nominal D!P. Answer$ B

D2Interpretive
/?. )onetarists #iew -o#ernment inter#ention in the economy as A) necessary to maintain full em"loyment. B) unnecessary and "otentially dama-in-. C) effecti#e because it stimulates ca"ital formation. !) leads to consistently hi-her em"loyment and out"ut. Answer$ B

D2Interpretive
5@. )onetarists ha#e maintained the Classical tradition by em"hasi9in- the A) im"ortance of -o#ernmentIs fineGtunin- "olicies. B) inflationary im"act of -o#ernment s"endin-. C) instability of money demand. !) inherent stability of the economy. Answer$ !

D2Factual
51. 1ational e&"ectations theory is based on the assum"tion that when indi#iduals in the economy are formin- e&"ectations' they A) use all a#ailable information. B) use "ast e#idence only. C) consistently ma.e the same errors. !) "ay no attention to "ast information. Answer$ A

D2Interpretive
5%. Accordin- to rational e&"ectations theory' A) increasin- the money su""ly to reduce unem"loyment will always be successful. B) decreasin- the money su""ly to reduce unem"loyment will usually be successful. C) increasin- the money su""ly to reduce unem"loyment will not be successful because of an offsettin- decrease in "rices. !) increasin- the money su""ly to reduce unem"loyment will not be successful because of an offsettin- increase in "rices. Answer$ !

Cha"ter %%The Classical Aoundations 13

D2Interpretive
5,. 3nder the assum"tion of rational e&"ectations' an antici"ated increase in the money su""ly has no effect on A) nominal D!P. B) real D!P. C) the "rice le#el. !) #elocity. Answer$ B

D2Factual
5/. <n an economy with no -o#ernment or forei-n sector' which of the followin- always holds true' e&G"ost7 A) Consum"tion equals in#estment B) Jelocity equals money demand C) Sa#in- equals consum"tion !) Sa#in- equals in#estment Answer$ !

D2Applied
55. <f D!P E F,@@ billion and #elocity E 1.5' then the money su""ly is A) indeterminate. B) F%@@ billion. C) F,@@ billion. !) F/5@ billion. Answer$ B

D2Applied
5;. Assume that consum"tion s"endin- is equal to F;@@' -o#ernment s"endin- is F1@@ billion' and D!P is F>@@ billion. <f net e&"orts are equal to 9ero' in#estment s"endin- must be A) F=@@ billion. B) F;@@ billion. C) F5@@ billion. !) F1@@ billion. Answer$ !

D1Factual
5=. 6hat economist in the early %@th century refined the use of the equation of e&chan-e7 A) (eanGBa"tiste Say B) <r#in- Aisher C) Thomas )althus !) Adam Smith Answer$ B

141itter2Silber23dell Money, Banking, and Financial Markets ' 4le#enth 4dition

D1Factual
5>. Accordin- to Classical economists' in#estment is BBBBBBBBBBBBBBBBBB related to the . A) directlyC interest rate B) directlyC le#el of D!P C) in#erselyC interest rate !) in#erselyC le#el of D!P Answer$ C

D2Applied
5?. 3sin- the Cambrid-e equation' by how much does the demand for money rise at a constant real D!P of F%'@@@ billion when the "rice le#el rises by 1@ "ercent from 1.@@' -i#en . E @.%57 A) F%@@ billion B) F%@ billion C) F55@ billion !) F5@ billion Answer$ !

D1Applied
;@. <f the fraction of the economyIs nominal D!P held by the "ublic in the form of money is %@ "ercent' income #elocity in the economy is A) 5. B) >@ "ercent. C) @.%@. !) %@. Answer$ A

D1Interpretive
;1. Accordin- to Classical interest rate theory' which of the followin- will decrease the equilibrium real interest rate7 A) A decrease in in#estment B) A decrease in sa#inC) An increase in money demand !) A decrease in money demand Answer$ A

D1Factual
;%. 1ou-hly s"ea.in-' the nominal interest rate is BBBBBBBBBBBBBBBBBB than the real interest rate by the amount of the e&"ected BBBBBBBBBBBBBBBBBB. A) hi-herC -rowth rate of real D!P B) hi-herC inflation rate C) lowerC -rowth rate of real D!P !) lowerC inflation rate Answer$ B

Cha"ter %%The Classical Aoundations 15

D2Interpretive
;,. <n the Classical model' an increase in a--re-ate demand leads to BBBBBBBBBBBBBBBBBB real D!P and BBBBBBBBBBBBBBBBBB "rice le#el. A) an unchan-edC an unchan-ed B) a risin-C an unchan-ed C) a risin-C a risin!) an unchan-edC a risinAnswer$ !

D2Factual
;/. <n the Classical model' what is certain to shift the a--re-ate demand cur#e7 A) A rise in the "rice le#el B) A rise in real D!P C) A rise in the money su""ly !) A rise in -o#ernment e&"enditure Answer$ C

D1Interpretive
;5. A decrease in the money su""ly shifts the a--re-ate BBBBBBBBBBBBBBBBBB cur#e to the . A) demandC left B) demandC ri-ht C) su""lyC left !) su""lyC ri-ht Answer$ A

D2Interpretive
;;. <n the Classical model' a decrease in the money su""ly BBBBBBBBBBBBBBBBBB the real D!P and BBBBBBBBBBBBBBBBBB the "rice le#el. A) lea#es unchan-edC lea#es unchan-ed B) lea#es unchan-edC lowers C) lowersC lowers !) lowersC lea#es unchan-ed Answer$ B

D1Factual
;=. The theory of 8rational e&"ectations: is most closely associated with BBBBBBBBBBBBBBBBBB economists. A) Classical B) *eynesian C) )onetarist !) +ew Classical Answer$ !

161itter2Silber23dell Money, Banking, and Financial Markets ' 4le#enth 4dition

D2Factual
;>. <n an economy without -o#ernment or a forei-n sector it is always true that A) actual sa#in- equals actual in#estment. B) actual sa#in- equals desired in#estment. C) desired sa#in- equals desired in#estment. !) desired sa#in- equals actual in#estment. Answer$ A

D2Factual
;?. <n an economy without -o#ernment or a forei-n sector the equilibrium le#el of out"ut occurs when A) actual sa#in- equals actual in#estment. B) actual sa#in- equals desired in#estment. C) desired sa#in- equals desired in#estment. !) desired sa#in- equals actual in#estment. Answer$ A

D1Factual
=@. 6hat is K L C equal to7 A) S B) S M T C) < M D !) T Answer$ A

D1Factual
=1. 6hat is K L S equal to7 A) < B) C L T C) < M D !) C Answer$ A

D2Interpretive
=%. <f C M < E K and K L C E S' then A) < E @. B) S E @. C) S E <. !) K E S M <. Answer$ C

D2Interpretive
=,. <f < E S' then A) C M < E S M <. B) C M S E S M <. C) C M S E C M <. !) C L S E S L <. Answer$ C