Question 1

Suppose the money supply increases by 10 percent but velocity is not constant. Given this information, it follows that:

Accepted Answer

The change in nominal GDP cannot be determined without knowing how the velocity of money changes. The quantity equation MV = PQ (where M is the money supply, V is the velocity of money, P is the price level, and Q is the real GDP) shows that if V is not constant, the effect on nominal GDP (PQ) from a change in M cannot be precisely determined without additional information.

Question 2

The quantity theory of money:

Accepted Answer

The quantity theory of money is more effective at explaining high inflation rates, particularly in scenarios where the money supply increases rapidly. It suggests that when the amount of money in an economy grows faster than its output, inflation will occur. This theory is less effective at explaining low inflation rates, as other factors (such as demand, productivity, and technological advancements) can play significant roles in influencing inflation when it is low.

Question 3

In the equation of exchange, if the velocity of money is constant, a 10 percent increase in the money supply must:

Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real GDP. If V is constant and M increases by 10 percent, then the product of PQ, which is nominal GDP, must also increase by 10 percent to maintain the equality, assuming V is constant and there are no immediate changes in Q (real GDP).

Question 4

Which of the following statements is consistent with the quantity theory of money?

Accepted Answer

The quantity theory of money suggests that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. It implies that monetary policy should not necessarily react to short-term economic fluctuations but rather follow a predictable, prescribed path, which aligns with option D.

Question 5

A reason that the quantity theory of money has lost favor is that:

Accepted Answer

The quantity theory of money has lost favor primarily because the direct relationship between money growth and inflation, which it posits, has been observed to weaken over time. Factors such as velocity of money and changes in how economies operate have contributed to this weakened relationship, making the theory less predictive and reliable in modern economic contexts.

Question 6

Which of the following is not one of the assumptions of the quantity theory of money?

Accepted Answer

The quantity theory of money does not assume that the money growth rate is constant. It primarily focuses on the relationship between the money supply and price level, assuming that the velocity of money is constant and that the money supply influences prices directly, without asserting a constant growth rate for money.

Question 7

Economists who believe in the quantity theory of money argue that:

Accepted Answer

Economists who support the quantity theory of money argue that the causation in the equation of exchange (MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the output of goods and services) goes from the money supply and its velocity (MV) to the price level and output (PQ). This suggests that changes in the money supply directly influence inflation and economic output.

Question 8

Suppose velocity is constant, but real GDP is not independent of the money supply. If this is the case, a 10 percent increase in the money supply will:

Accepted Answer

The answer of Suppose velocity is constant, but real GDP...

Question 9

According to the quantity theory of money, if the monetary authorities allow the money supply to grow at a rate of 6 percent in an economy that is growing by 2 percent in real terms, then inflation will be:

Accepted Answer

The quantity theory of money suggests that if the money supply grows at a faster rate than real output, the difference will be reflected in inflation. Here, with a 6 percent growth in money supply and 2 percent real growth, inflation would be 4 percent (6% - 2% = 4%).

Question 10

According to institutionally-focused economists:

Accepted Answer

Institutionally-focused economists often argue that the direction of causation in the equation of exchange (MV = PQ) goes from PQ (price level times the quantity of goods and services produced) to MV (money supply times the velocity of money), suggesting that economic output and prices drive the money supply and its velocity, rather than the other way around. This perspective emphasizes the role of economic institutions and policies in shaping the money supply and its velocity based on the needs of the economy.

Question 11

The quantity theory of money:

Accepted Answer

The quantity theory of money holds relevance in certain economic contexts or conditions but may not apply universally or in all cases. Its applicability can vary depending on factors like the velocity of money, the state of the economy, and the presence of digital currencies and other modern financial instruments.

Question 12

Institutionally-focused economists argue:

Accepted Answer

Institutionally-focused economists argue that the equation of exchange should be read from right to left, emphasizing the role of expenditures and output in determining the money supply and velocity, rather than the other way around. This perspective focuses on the demand side of the economy and the institutional factors that influence it.

Question 13

If the money stock grows by 13 percent, and during that same time nominal GDP grows by 3.3 percent, what can we deduce happens to velocity during this period?

Accepted Answer

Velocity of money fell because the growth rate of the money stock (13%) was much higher than the growth rate of nominal GDP (3.3%), indicating that each unit of money was used less frequently for transactions.

Question 14

The institutionalist theory of inflation differs from that of the quantity theory by focusing on:

Accepted Answer

The institutionalist theory of inflation emphasizes the role of firms and their decision-making processes regarding wages and prices, rather than focusing on the money supply or the equation of exchange like the quantity theory.

Question 15

A reason that the quantity theory of money has lost favor is that:

Accepted Answer

The velocity of money not being constant undermines the predictive power of the quantity theory of money, which assumes a stable velocity to forecast the relationship between money supply and price levels.

Question 16

Stagflation is a combination of:

Accepted Answer

Stagflation is characterized by high and accelerating inflation combined with high unemployment, reflecting a period of economic stagnation alongside rising prices.

Question 17

According to institutionally-focused economists,

Accepted Answer

Institutionally-focused economists argue that inflation is often a result of price-setting conventions by institutions, rather than simply changes in money supply or demand. They emphasize the role of wage and price controls, market structures, and other institutional factors in influencing inflation rates.

Question 18

A reason why the quantity theory of money is problematic is that:

Accepted Answer

The quantity theory of money assumes that the velocity of money is constant. However, the velocity of money has fluctuated over time, which challenges the theory's assumptions and its predictions about the relationship between money supply changes and price level changes.

Question 19

Assuming velocity is constant, the rate of inflation equals the difference between the rate of:

Accepted Answer

The rate of inflation is determined by the difference between the growth rate of the money supply and the growth rate of real GDP, assuming velocity is constant.

Question 20

According to the quantity theory of money, if the money supply increases by 12 percent, then in the long run, prices go:

Accepted Answer

The quantity theory of money suggests that if the money supply increases by a certain percentage, and if the velocity of money and the quantity of goods and services in the economy remain constant, then the price level will increase by the same percentage. Therefore, a 12 percent increase in the money supply would lead to a 12 percent increase in prices in the long run.

Quiz 34: Inflation, Deflation, and Macro Policy

Suppose the money supply increases by 10 percent but velocity is not constant. Given this information, it follows that:

The quantity theory of money:

In the equation of exchange, if the velocity of money is constant, a 10 percent increase in the money supply must:

Which of the following statements is consistent with the quantity theory of money?

A reason that the quantity theory of money has lost favor is that:

Which of the following is not one of the assumptions of the quantity theory of money?

Economists who believe in the quantity theory of money argue that:

Suppose velocity is constant, but real GDP is not independent of the money supply. If this is the case, a 10 percent increase in the money supply will:

According to the quantity theory of money, if the monetary authorities allow the money supply to grow at a rate of 6 percent in an economy that is growing by 2 percent in real terms, then inflation will be:

According to institutionally-focused economists:

The quantity theory of money:

Institutionally-focused economists argue:

If the money stock grows by 13 percent, and during that same time nominal GDP grows by 3.3 percent, what can we deduce happens to velocity during this period?

The institutionalist theory of inflation differs from that of the quantity theory by focusing on:

A reason that the quantity theory of money has lost favor is that:

Stagflation is a combination of:

According to institutionally-focused economists,

A reason why the quantity theory of money is problematic is that:

Assuming velocity is constant, the rate of inflation equals the difference between the rate of:

According to the quantity theory of money, if the money supply increases by 12 percent, then in the long run, prices go: