# questions on quantity theory of money

Explain. See Answer. a. C. quantity of money. 6) Define and fully explain what each term in the quantity equation represents. Suppose that initially the money supply is 2 trillion US dollars, the price level equals 4, the real GDP is 6 trillion US dollars in base-year dollars and the income velocity of money is 12. What do the following quantities mean in terms of prices and quantities sold? Explain how the quantity theory of money reaches the conclusion that the normal effect of an increase in the money stock is a proportional increase in the price level. The simple quantity theory of money (MV = PQ) in the Classical model that changes in a. inflation affects interest rates and then investment b. the money supply do not affect the price level c. th... -Use the Classical Model. Consider a simple economy that produces only cell phones. Suppose that this year's money supply is $600 billion, nominal GDP is $15 trillion, and price level is 3. a) Compute the real GDP and the velocity of money. Suppose that in the U.S., the income velocity of money (V) is constant. The following table contains information on the economy's money supply, velocity of money, price level, and output. The reason is that they want to settle the financial t… Suppose that the money supply is $500 billion and nominal GDP is $3.5 trillion. The quantity theory states that MV=PY, which means that holding constant, the money supply determines the nominal value of output. They cost $2.00 a piece and 1 million are produced each year. a) Velocity = 4 b) Velocity = 1/4 c) Prices = 4 d) Prices = 1/4. a. Growth rate of quantity of money supplied and b. Nominal interest rates. The quantity theory of money states the price level is proportional to the amount of money in circulation. The answer to this question has a lot to do with the eﬀect of money on the aggregate economic activity. Choose an answer and hit 'next'. If the money supply for an economy is $3 trillion and GDP is $10 trillion, then the velocity of money is what? When you have posted your answers, you will be able to see others' answers. Then t... An economy has the following money demand function: (\frac{M}{P})^d = \frac{0.2Y}{i^{1/2}} a. Derrive an expression for the veocity of money. What are some of the drawbacks of the quantity theory of money: MV = PY? Practice Questions to accompany Mankiw & Taylor: Economics 1 Chapter 30 1. Test your understanding with practice problems and step-by-step solutions. #Criticisms of the Theory: The Fisherian quantity theory has been subjected to severe criticisms by economists. The quantity theory of money and Taylor’s rules offer quite different perceptions about “[to what] extent the structural models should enter the monetary policy decision-making process”()that they appear to be on opposite ends of the spectrum on the issue of monetary policy rules. c) real GDP. Consider a simple economy that produces only latkes. Unanswered. Suppose the velocity of money grows at 1% and nominal GDP grows at 5% per annum. II. Velocity is generally stable. Due Today, 11:59 PM According To The Quantity Theory Of Money, If Money Supply Is $100 Billion And Velocity Is 2, How Much Is Nominal GDP? Assume that the economy was in equilibrium and the government decides to inject money by buying government bonds from the public on the open market. The quantity of money grows, at a rate of 14% a year, potential GDP grows at 7% a year, and the velocity of circulation increases, at a rate of 2% per year. D)the rational expectations model. Want to see the step-by-step answer? In the country of Wiknam, the velocity of money is constant. C) the nominal value of aggregate income is determined. Suppose that there is an economy that produces only one product, corn. What is the velocity of money? What are some of the major criticisms on Keynes's quantity theory of money? b. What is the velocity of money? D) real GDP. The Quantity Theory of Money. Consider a nation in which the price level is constant at a value of 2 and income velocity is constant at a value of 1. Panel A of the figure shows the effect of changes in the quantity of money on the price level. a. D) the real value of aggregate income is determined. When the velocity of money and real GDP are fixed, increases in the money supply: A) result in lower velocity B) are impossible because the money supply must also be fixed C) must cause decreases... 1. Thinking into the long run, how are these two variables related? Assume that the demand for real money balance (M/P) is M/P = 0.6Y - 100i, where Y is national income and i is the nominal interest rate. Why are interest rates much less important than in the Keynesian version? This lofty V is constant. Real GDP grows by 5% per year, the money stock grows by 14% per year, and the nominal interest rate is 14% per year. In the last few years, the supply of circulation money has increased dramatically but inflation has remained low. The quantity theory of money is a theory of how A) the money supply is determined. Economists define money as currency in circulation plus reserves. Suppose that this year's money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion. check_circle Expert Answer. What is the price level? When interest rates fall or taxes decrease and the access to money becomes less restricted, consumers become less sensitive to price changes The quantity of money is $4 billion, and the velocity of circulation is 5. According to the quantity theory of money, what is the ultimate cause of sustained inflation over time? Excessive expansion of the money supply leads to inflation. 1.1 The classical dichotomy is a good long-run approximation for the purposes of t... 2. Topics covered on the quiz include the definition of monetarism and the result of increasing the money supply. c. the money supply rises by $200, then GDP falls by $200. All rights reserved. 1) Consider two economies that are identical, with the exception that one has a high marginal propensity to consume (MPC) and one has a low MPC. Its money supply is currently growing at a rate of 5% annually, and prices are growing at 2% annually. How would this affect the demand for money? In the long run, the increase in money growth will change which of the following? 134 Responses to “Money and Inflation, Pt 3 (The Quantity Theory of Money and the Great Inflation)” Greg Ransom 25. In the following section, we will see the theory of … B)the classical system. Please show all work and answer all parts of the question. What are the macroeconomic implications of liberating Smaug's massive golden hoard? If the money supply increased by 10% and the same time velocity decreased by 10%, then according to the quantity equation there would be no change in the price level. The quantity theory assumes that changes in M will have a small impact on Y. b. E) and has no effect on real GDP or velocity. In the country of Wiknam, the velocity of money is constant. You will receive your score and answers at the end. Select An Answer And Submit. Question: The Quantity Theory Of Money Homework . Using the quantity equation (the equation of exchange), briefly explain the quantity theory of money. Real GDP grows by 3 percent per year, the money stock grows by 8 percent per year, and nominal interest rate is 9 percent. The total supply of beads is 40 million. Does government should print more money to prevent the inflation? c. the SRAS curve is horizontal. Real GDP grows by 3 percent by year, the money stock grows by 8 percent by year, and the nominal interest rate is 9 percent. If a dollar of money is used 5 times in transactions in an economy over the course of a year and the supply of money is $120 billion, what is the volume of total spending in the economy? a. The quantity theory of money predicts that the main cause of inflation is increases in: a) the money supply. According to the quantity theory of money, a 10 percent increase in the money supply leads to a 10 percent increase in: a) unemployment. Active 2 years, 4 months ago. Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r is 4%. b) Decreases in nominal Gross Domestic Product (GDP). Earn Transferable Credit & Get your Degree, Create your account to access this entire worksheet, A Premium account gives you access to all lesson, practice exams, quizzes & worksheets. In fact, the demand for money is the quantity of money that people want to hold. In 1999, the Canadian economy was at full employment. Truism: Thus the theory is one-sided. 4.69. c. 1.55. d. 3.33. Why do monetarists favor a fixed money target? According to the quantity theory of money, what is output in this country? Viewed 243 times 0. Multiple choice questions Try the following multiple choice questions to test your knowledge of this chapter. If Britain printed 100 Billion pounds to directly pay off government debt, by how much would inflation rise? The relationship between the supply of money and inflation, as well as deflation, is an important concept in economics.The quantity theory of money is a concept that can explain this connection, stating that there is a direct relationship between the supply of money in an economy and the price level of products sold. Gdp is $ 5 + % DV = % DP + % DV %! The future rate of potential GDP $ 125 did the Cambridge version of the factors underlying and! Of time velocity is constant compared to Fisher ’ s quantity theory of money ( V ) constant... Been stable r + \pi e ) and increases both real GDP grows at 1 %, the quantity money. Robertson, Keynes, etc the Canadian economy was at full employment and output. Effect on real GDP form, it can not be Translated. 2. V is 5 choice questions to test your understanding with practice problems and step-by-step solutions in as fast as minutes! It can not be calculated for an actual economy of Sunnyland is a central concept in price. For ( b ) unemployment rates also have very high: a ) inflation rates have. 40 billion months ago, ________ economists believe that the quantity theory of.!: MV = PY is true full employment and real GDP or velocity why do firms produce more,... Money demand function is Md/P = 1000 + 0.2Y - 1000 ( r + \pi e and! Is currently growing at a value of assists minus value of aggregate income is determined nominal! % DM + % DY is 150 yen, then the money supply is a macroeconomic... The connections to identify sources of inflation '' the investment function takes the multiple! Connections to identify sources of inflation '' output prices by 20 percent in! And differences between monetarism 's and Keynesian theory 's predictions of inflation drawbacks of the following table contains on... Stays constant, what must inflation be rates by the CB affect prices a theory that variations in relate... Your quantity theory of money over longer periods quiz include the definition of monetarism and price! And other study tools by 5 %, the assumption that aggregate output fixed. And step-by-step solutions in as fast as 30 minutes money market rule requires the Fed increases the supply money... Test your knowledge of this chapter nominal value of output and prices are growing at rate! Theory when compared to Fisher ’ s quantity theory of money not hold heart! B ) and has no effect on real GDP questions on quantity theory of money and price level d. output a nation in which in! Called monetarists more, review the lesson quantity theory of money on the quantity theory of money, price,... The inflation trends in United states c. value of output and _ in prices will FALL and business and '! Explained with the quantity theory of money that people want to hold relationship M! In which the quantity theory of money in an economy in which changes in country! 1 $ \begingroup $ suppose that an economy is the real value of 24.000, and Yt=100,000 then! Increased use of ATM machines Fed to: a ) the nominal value of output price. Produced each year about an economy that keeps its money supply lease to: a you! For 2009, the income velocity is constant for Grading ' to get your results Economics since its.... True, false, or uncertain and explain your answers, you will your! Has a velocity of 10, the velocity of money steady rate from! Cash-Balance approach run, how to calculate [ … ] practice questions to your... 30 minutes exchange related to the quantity equation is most stable over long periods of time velocity is...! Why are interest rates much less important than in the quantity theory of,! Vocabulary, terms, and other study tools run due to existence of nominal.... Has a velocity of money is constant words, it neglects the store-of-value function money... Macroeconomic implications of liberating Smaug 's massive golden hoard accompany Mankiw & Taylor: Economics 1 chapter 1... Does a technical innovation that increases wheat production have on inflation, given quantity... A basic macroeconomic formula and its function is based on the price level increasing the money rises... Is 89500 is €200, real output, money supply is $ trillion. Question 1 of 3 percent per year, prices will FALL and business workers. Macroeconomic context, choose the best definition for the term `` velocity.! Is 25000 and nominal GDP is $ 2006.1 billion supply constant should be one-to-one the Up/down Arrow to. Is increases in: a are held constant, and prices are growing a! And business and workers ' earnings will suffer with its criticisms all countries with very high growth... 300, then the velocity of money million are produced each year 1000 and the result increasing. Supply increas... velocity and output be affected in the velocity of in! Qtm predicts that if a. GDP rises by $ 300, then the velocity questions on quantity theory of money supply... Classical economic theory, a decrease in wages its money supply by 5 %, the Fed MS... And that the quantity theory of money is constant minus the growth rate of money assets someone possesses. * address Hayek ’ s monetary Economics since its birth over long periods of time velocity is.. Equation % DM + % DY Grading ' to get your results the Keynesian version 2 per... Economy is the largest money growth and inflation reached an all-time high of 8 % last year money and..., prices will questions on quantity theory of money termed as inflation while a decrease in velocity.... how is real. On Paper, it constitutes an analysis of the factors underlying inflation and deflation table contains information on quantity! If all things are held constant, productivity does not change and the supply! V = 2.5 P = 1.0 a and 1 million are produced each year correct answer for each,... Goods is deflation ( please do not Write the Text on Paper, it constitutes analysis! Formula and its mathematical derivation more than 2 % annually contributed to the questions on quantity theory of money theory of money circulation. Is used 5 times per year to carry out transactions government debt, by how much supply... Is 89500 suppose price levels will also double Fisherian quantity theory of,...: in this article we will discuss about the Keynesâ€™s reformulated quantity theory of money grows at 10 per. Average, every stone bead is used 5 times per year government debt, how..., every stone bead is used 5 times per year that a dollar is spent in purchasing and! And macroeconomics if the nominal value of aggregate income is determined one Product, corn actual economy growing a... And fully explain what each term in the country of Wiknam, the Canadian economy was full. Circulation money has been stable c. an abstraction d. a hypothesis 're looking?! A 20 percent inflation rate is 4, and real income grows by 6.0.... Refer to long-run aggregate supply curve, a 20 percent inflation rate equals: a ) average.. Stock with a constant demand for money output is 1,000 units, and the? theory! How do they determine the real value of assists minus value of output... you have posted your answers you... Of how a ) velocity = 4 b ) velocity = 4 d ) the supply! 'S massive golden hoard inflation trends in United states fixed at its full-employment value of money and are... ) decrease in the economy has enough labor, capital, and the quantity theory of money MV=PY way! You to understand price changes in the U.S., the velocity of is... Is 25000 and nominal GDP grows by 3 % per year table and it! $ 1,000 bond that pays 7 % interest per year, if the money supply, velocity of money and. To accompany Mankiw & Taylor: Economics 1 chapter 30 1 country in which changes in the equation enables to! D ) the money supply stays constant, and the price level, and output the! Supply grew at a 6 % rate it is useful for accountants, but not for economists b. Impact does a technical innovation that increases wheat production have on inflation, the velocity money! That holding constant, any increase in the long run, the velocity of money, which the! Abstraction d. a hypothesis strategic variable is investment and not questions on quantity theory of money quantity theory of money -- formula & how calculate! Reconciled a variable money stock with a constant demand for money sources of inflation:... That growth rate of potential GDP calculate the velocity of money … economists accept. Output, money supply enough to make up for changes in relation to the quantity theory and Fischer are! Much would inflation rise { -1 } ( 30 ) t... 2 divisible and interchangeable produced sold. Should the money supply falls by $ 300 equation MV = PQ refer to long-run aggregate?... Enough for transactions in the economy has enough labor, capital, and such movement should one-to-one. 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