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22.3Â Â Real Versus Nominal Rates of Interest 1) If the inflation rate is 5 percent and the real rate of interest is 3 percent, the nominal interest rate is A) 8 percent. B) 5 percent. C) 3 percent. D) 2 percent. 2) Assuming a nominal interest rate of 6 percent, an unemployment rate of 4 percent, and an inflation rate of 2 percent, the real interest rate is approximately A) 2 percent. B) 4 percent. C) 6 percent. D) 8 percent. 3) Roughly speaking, the nominal interest rate is __________ than the real interest rate by the amount of the expected __________. A) higher; growth rate of real GDP B) higher; inflation rate C) lower; growth rate of real GDP D) lower; inflation rate 22.4Â Â Modern Modifications: Monetarists and New Classicists 1) The origins of modern monetarism lie in the work of the A) Classical economists. B) Keynesians. C) Malthusians. D) Mercantilists. 2) Classical economists and modern monetarists agree that the best way to examine the economy is through the use of A) aggregate supply and demand. B) the multiplier. C) the quantity theory. D) the GNP account. 3) Modern Monetarists argue that the velocity of money is A) constant. B) the inverse of the money multiplier. C) unmeasurable. D) predictable. 4) Modern monetarists view any increases or decreases in total output stemming from expansions or contractions in the money supply as A) permanent. B) temporary. C) irrelevant. D) extremely important. 5) The Great Depression is thought to have been prolonged and made deeper by A) contraction of the money supply. B) the stock market crash. C) speculative behavior of investors. D) rapid inflation. 6) Monetarists differ from Classical economists in that they argue that A) changes in the money supply affect only the price level in the long run. B) velocity is not fixed but is predictable. C) the economy tends to be stable around full employment. D) the demand for money is a fixed fraction of nominal GDP. 7) Monetarists view government intervention in the economy as A) necessary to maintain full employment. B) unnecessary and potentially damaging. C) effective because it stimulates capital formation. D) leads to consistently higher employment and output. 8) Monetarists have maintained the Classical tradition by emphasizing the A) importance of government’s fine-tuning policies. B) inflationary impact of government spending. C) instability of money demand. D) inherent stability of the economy. 9) Rational expectations theory is based on the assumption that when individuals in the economy are forming expectations, they A) use all available information. B) use past evidence only. C) consistently make the same errors. D) pay no attention to past information. 10) According to rational expectations theory, A) increasing the money supply to reduce unemployment will always be successful. B) decreasing the money supply to reduce unemployment will usually be successful. C) increasing the money supply to reduce unemployment will not be successful because of an offsetting decrease in prices. D) increasing the money supply to reduce unemployment will not be successful because of an offsetting increase in prices. 11) Under the assumption of rational expectations, an anticipated increase in the money supply has no effect on A) nominal GDP. B) real GDP. C) the price level. D) velocity. 12) The theory of “rational expectations” is most closely associated with __________ economists. A) Classical B) Keynesian C) Monetarist D) New Classical