Question

1. The quantity theory of money states that the fed:

A) Has complete control of the level of production

B) Has to be extremely careful when using monetary policy to figure out the level of production

C) determines the price/output

D) Has zero control over levels of production

E)Has zero control over price level

2. To create a 3% growth in an economy, monetarists think that the money supply should:

a) increase yearly by more than 3%

b) increase yearly by less than 3%

c) Increase yearly at 3%

d) Decrease yearly at 3%

e) stay constant

Answer 1

1. Answer is option D).

Explanation: Quantity theory of money states that quantity of money and price level in the economy are directly related. As Fed increases the money supply in the economy inflation also rises. However, Fed has no control over economic output according to quantity theory of money. Thus, fed has some control over the price level of the economy and zero control over the levels of production.

2. Answer is option A).

Explanation: an increase in money supply causes interest rate to decrease. This makes more money available for producers to increase production.Thus level of production rises in the economy thereby increasing the economic growth of the economy.