Question

1. If no one suffers from money illusion, what are the consequences, according to Classical economists, of an increase in the money supply?

a. real output, employment and real wages will increase

b. there will be a temporary increase in real wages, employment, and real GDP

c. there will be inflation, but no change in real GDP, employment, or real wages

d. there will be an increase in real and nominal wages, but also inflation, more unemployment, and no change in real GDP

e. higher nominal wages and prices that accompany higher real GDP and employment

2. Milton Friedman and Anna Schwartz looked at Federal Reserve policies in the first few years of the Great Depression. They found two specific events in which Federal Reserve policies amounted to “crimes of omission.” In both instances, they criticized the Federal Reserve for

    a.    raising interest rates during the depression
    b.    reducing the money supply through open market operations
    c.    taking the U.S. off of the Gold Standard
    d.    failing to act as a lender of last resort
    e.    creating inflation in the middle of a depression (i.e., stagflation)

3. According to Milton Friedman and Anna Schwartz, what was the Federal Reserve’s “crime of commission” that occurred in the Summer/Fall of 1931 that had a devastating effect on the course of the Great Depression?

    a.    the Federal Reserve began extensive debt monetization
    b.    the Federal Reserve allowed panic and a bank run to continue
    c.    the Federal Reserve changed from a policy of targeting interest rates to a policy of targeting money supply growth
    d.    the Federal Reserve drove up interest rates and reduced the money supply in order to defend the Gold Standard
    e.    the Federal Reserve removed all gold backing from the American money supply

4. What was the biggest weakness of the Gold Standard?

    a.    it gave central banks too much discretion
    b.    it never worked well
    c.    countries often abandoned or suspended the Gold Standard when it was needed most
    d.    the Gold Standard was a “dirty float” system
    e.    there was too little gold available to make the Gold Standard feasible

5. In the U.S. and other developed countries, the national debt is measured in billions and trillions of dollars (or the equivalent in other currencies). Money of these magnitudes is almost impossible to comprehend. The better way to measure national debt is to calculate  

    a.    debt per capita
    b.    hidden debt divided by visible debt
    c.    the debt/GDP ratio
    d.    real debt
    e.    the debt/interest rate ratio

6. Who was responsible for handling a run on the bank before 1913?

    a. the Treasury Department
    b. the Federal Reserve
    c. banks themselves
    d. the World Bank
    e. state governments

Answer 1

1. If no one suffers from money illusion, what are the consequences, according to Classical economists, of an increase in the money supply?

c. there will be inflation, but no change in real GDP, employment, or real wages

Explanation: If there is no money illusion, then workers will demand increase in wages due to higher price level. This will push the AS curve leftward. So there will be no change in real GDP or employment. Only price level and nominal wages will rise.

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