QUESTION 1: According to the quantity theory of money, the quantity of money determines the

a. interest rate.
b. level of real output.
c. price level.
d. level of employment.

QUESTION 2: In the equilibrium version of the classical model, the velocity of money

a. depends on the real rate of interest.
b. depends on the level of employment.
c. is equal to the Cambridge k.
d. is stable in the short run.

QUESTION 3: According to the classical model, a 10-percent increase in the money supply, holding everything else constant, will lead to

a. a 10% increase in prices, a 10% increase in the real wage, and a 10% increase in interest rates.
b. a 10% increase in prices, a 10% increase in the money wage, and a 10% increase in interest rates.
c. a 10% increase in prices, a 10% increase in the money wage, and no change in interest rates.
d. a 10% increase in prices and no change in the money wage or interest rates.
e. none of the above.

QUESTION 4: The classical model predicts that, in the short-run, a tax cut financed by an increase in the money supply would

a. leave output and the price level unchanged.
b. increase the price level but leave output unchanged.
c. increase output but and reduce the price level.
d. increase output and the price level by increasing aggregate demand.
e. None of the above.

QUESTION 5: In the classical model, a rise in the marginal income tax rate would

a. cause the price level to rise and the level of real output to fall.
b. cause the price level and the level of real output to both fall.
c. cause the price level to rise with no effect on real output.
d. leave both real output and the price level unchanged.

QUESTION 6: In the classical model, an exogenous increase in saving is assumed to increase

a. the demand for loanable funds, which decreases interest rates.
b. the supply of loanable funds, which decreases the equilibrium interest rates.
c. both the demand for money and loanable funds, which reduces interest rates.
d. neither the demand for money nor bonds, leaving interest rates unchanged.

QUESTION 7: In the classical model, the level of business investment was a function of

a. only the expected profitability of investment projects.
b. only the real interest rate.
c. both the expected profitability of investment projects and the real interest rate.
d. only the nominal interest rate.
e. None of the above.

QUESTION 8: If the quantity of investment has fallen but interest rates have risen, then

a. this cannot be explained in the classical model.
b. savings fell.
c. savings rose.
d. investment demand rose.

QUESTION 9: Which of the following is (are) correct? In the classical system, the suppliers of bonds were the

a. government which always sold bonds to finance a new project.
b. firms which financed all investment expenditures by selling bonds.
c. government which might sell bonds to finance spending in excess of tax revenues.
d. Both b and c.

QUESTION 10: The difference between savings and investment is that

a. investment is purchasing stock, while savings is putting money in a bank.
b. investment is purchasing capital, savings is postponing consumption.*
c. Investment increases output, while savings decreases output.
d. None of the above.

QUESTION 11: According to the quantity theory, inflation is ultimately controlled by

a. private firms who set prices.
b. the monetary authorities who control the money supply.
c. those who control output.
d. the price of oil.

QUESTION 12: Classical economists

a. argued that the money supply determined aggregate demand.
b. regarded monetary policy as unimportant since the quantity of money does not determine the price level.
c. believed that the quantity of money influences interest rates and real wages.
d. believed that prices would increase more than proportionate to an increase in the money supply.

QUESTION 13: Which of the following statements applies to the classical system?

a. There is money wage inflexibility since full employment already existed
b. A perfectly flexible money wage is not always a requirement for full employment
c. Full employment was easily explained with downward money wage rigidity
d. An imperfect market structure is requirement for full employment
e. none of the above

QUESTION 14: In the classical theory of aggregate demand, a decrease in the propensity to hold money will

a. shift the aggregate demand curve up.
b. Shift the aggregate demand and supply curves up and to the right.
c. have no effect on aggregate demand as the money supply changes.
d. will increase the money supply

QUESTION 15: If there is an increase in government spending that is financed by issuing bonds, then

a. interest rates should rise which increases private investment.
b. interest rates will remain the same unless taxes are reduced as well.
c. interest rates should fall which increases private investment.
d. interest rates should rise which decreases private investment.
e. None of the above.