If the money supply grows by 7%, the velocity of money is stable, and real GDP growth is 3%,

then the inflation rate is 4 percent.

Modern economists view the quantity theory of money as

only true over long time intervals.

Inflation occurs when

too much money chases too few goods.

In the short run, wages and prices are a bit sticky. Thus, economists expect an increase in M to

increase both P and Y in the short run.

Suppose we are told that the money supply is constant, but that people increase their spending.

The first step is to increase V, then we think about P x Y.

The quantity theory of money asserts that if the money supply rises by 10 percent, then

the price level rises by 10 percent too.

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Equation of Exchange and Quantity Theory of Money

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Questions 15

Answers

1
Which part of the equation, M x V = P x Y, is interpreted as total spending in the economy?
Y
P
M
M x V
2
If the money supply grows by 7%, the velocity of money is stable, and real GDP growth is 3%,
then the inflation rate is 4 percent.
then the inflation rate is 3 percent.
then the inflation rate is 7 percent.
then the inflation rate is 10 percent.
3
Modern economists view the quantity theory of money as
only true over long time intervals.
true over both short and long time intervals.
unimportant.
only true over short time intervals.
4
A decrease in the overall level of prices in an economy is called
inflation.
"manna from heaven."
dis-inflation.
deflation.
5
Inflation occurs when
too much money chases too few goods.
supply creates its own demand.
tax rates rise too high.
what is good for the goose is good for the gander.
6
In the short run, wages and prices are a bit sticky. Thus, economists expect an increase in M to
increase both P and Y in the short run.
decrease V and increase Y in the short run.
increase V without changing P or Y in the short run.
increase V, decrease P, and increase Y in the short run.
7
Suppose we are told that the money supply is constant, but that people increase their spending.
The first step is to increase P, then we think about Y.
The first step is to increase V, then we think about P x Y.
The first step is to increase Y, then we think about P.
"M x V = P x Y" does not help us organize our thinking here.
8
Which expression would be the best representation of the growth rate of spending?
% Δ M / % Δ P
P
% Δ M + % Δ V
% Δ M
9
From the equation of exchange we learn that the inflation rate, %ΔP, equals
%ΔM / %ΔY.
%ΔM + %ΔV - %ΔY.
%ΔM + %ΔV + %ΔY.
%ΔM + %ΔV.
10
What measures nominal GDP in the equation M x V = P x Y ?
M
P x Y
V
P
11
Recall: M x V = P x Y What measures the number of times that each dollar is spent?
P
Y
V
M
12
If production does not change, then the quantity theory of money asserts that if the money supply decreases, then
the velocity of money rises.
nominal GDP falls too.
real GDP falls too.
the price level rises.
13
The quantity theory of money asserts that if the money supply rises by 10 percent, then
the price level rises by 10 percent too.
real GDP falls by 10 percent.
real GDP rises by 10 percent too.
the velocity of money falls by 10 percent.
14
The quantity theory of money asserts that if the money supply rises, then
the velocity of money falls.
real GDP rises too.
the price level rises too.
nothing else in the equation will change.
15
If M = 10 billion, P = 2, and V = 5, then Y is ?
4 billion
50 billion
20 billion
25 billion

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