Question 1

The quantity theory states that money is neutral:
A) in both the short run and the long run.
B) only in the short run.
C) only in the long run.
D) neither in the short run nor in the long run.

Accepted Answer

The quantity theory of money states that the long-run changes in the money supply only affect the price level, while leaving real output and employment unaffected. Therefore, money is neutral only in the long run, and not in the short run, where changes in the money supply can have real effects on output and employment.

Question 2

Suppose real GDP and velocity of money remain constant. If money supply doubles, then the inflation rate will be:
A) 10%.
B) 50%.
C) 100%.
D) 200%.

Accepted Answer

According to the quantity theory of money, MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. Assuming that real GDP and velocity of money remain constant, we can simplify this equation to M = (P x Y)/V. Doubling the money supply (M) would double the nominal value (P x Y), and hence double the price level (P). Therefore, the inflation rate would be 100%.

Question 3

Disinflation is a decrease in the:
A) exchange rate.
B) average level of prices.
C) inflation rate.
D) the velocity of money.

Accepted Answer

Disinflation refers to a slowdown in the rate of inflation, meaning the general level of prices is still rising but at a slower pace than before.

Question 4

Between 1960 and 1990, Argentina's money supply grew at approximately 80%. According to the quantity theory of money, inflation rates in Argentina should have been approximately _____ during this period.
A) 20%
B) 40%
C) 80%
D) 160%

Accepted Answer

The quantity theory of money suggests that if the money supply in an economy grows at a certain rate, the price level (and thus the inflation rate) should grow at a similar rate, assuming velocity of money and output remain constant. Therefore, if Argentina's money supply grew at approximately 80%, the inflation rate should have been approximately 80% as well, according to this theory.

Question 5

The quantity theory of money predicts that the price level:
A) increases with the quantity of money in the economy.
B) decreases with the quantity of money in the economy.
C) is relatively constant.
D) is difficult to predict.

Accepted Answer

The quantity theory of money states that the price level is directly proportionate to the quantity of money in the economy. As the amount of money in circulation increases, prices will rise, and as the amount of money in circulation decreases, prices will fall. Therefore, the correct answer is A, increases with the quantity of money in the economy.

Question 6

If the growth rate of the money supply decreases from 10% to 5%, which of the following is a prediction of the quantity theory of money?
A) disinflation
B) deflation
C) hyperinflation
D) money illusion

Accepted Answer

The quantity theory of money suggests that if the growth rate of the money supply decreases, it would lead to a slower rate of inflation, or disinflation, as there is less money chasing the same amount of goods and services.

Question 7

The quantity theory of money assumes that real GDP:
A) increases with the quantity of money in the economy.
B) decreases with the quantity of money in the economy.
C) is relatively stable.
D) is difficult to predict.

Accepted Answer

The quantity theory of money assumes that the velocity of money is relatively stable and real GDP is determined by factors such as technology, labor, and capital. Therefore, changes in the quantity of money should primarily affect prices rather than real GDP.

Question 8

The quantity theory of money:
A) describes the general relationship between money, velocity, real output, and prices.
B) presents the critical roles of money demand in regulating the level of prices.
C) derives the optimal quantity of inflation.
D) explains the equilibrium between money supply and money demand.

Accepted Answer

The quantity theory of money primarily describes the relationship between the money supply, its velocity, the level of real output, and the price level, often summarized by the equation MV = PY.

Question 9

In times of financial panic, we expect the velocity of money to:
A) increase.
B) decrease.
C) remain relatively constant.
D) first increase and then decrease.

Accepted Answer

During times of financial panic or uncertainty, people tend to hold onto their money instead of spending it, which leads to a decrease in the velocity of money. This means money is not circulating as quickly, which can worsen the overall economic situation.

Question 10

According to the quantity theory of money, a change in the money supply affects:
A) real GDP in the short run but not in the long run.
B) real GDP in the long run but not in the short run.
C) nominal GDP in the short run but not in the long run.
D) nominal GDP in the long run but not in the short run.

Accepted Answer

The answer of According to the quantity theory of money,...

Question 11

Disinflation occurs when the overall price level:
A) falls.
B) rises at a decreasing rate.
C) rises at an exponential rate.
D) falls at an increasing rate.

Accepted Answer

Disinflation refers to a slowdown in the rate of inflation, meaning that prices are still increasing but at a slower pace than before.

Question 12

If the money supply in a country is $200 million, the velocity of money is 5, and real GDP is 250 million, the price level of the country must be:
A) 1.25.
B) 4.00.
C) 6.25.
D) 8.00.

Accepted Answer

The equation of exchange is MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. Plugging in the values given, we get:
(5)($200 million) = P($250 million)
$1 billion = P($250 million)
P = $1 billion ÷ $250 million
P = 4.00, which means the price level of the country must be 4.00.

Question 13

Suppose the nominal GDP of a country is $500 billion. If the velocity of money in the country is 10, then the country's money supply will equal:
A) $5,000 billion.
B) $510 billion.
C) $490 billion.
D) $50 billion.

Accepted Answer

The money supply can be calculated using the equation of exchange: MV = PQ, where M is the money supply, V is the velocity of money, and PQ is the nominal GDP. Given V = 10 and PQ = $500 billion, M = PQ/V = $500 billion / 10 = $50 billion.

Question 14

According to the quantity theory, what causes inflation in the long run?
A) unemployment
B) unexpected inflation
C) money supply growth
D) aggregate demand shocks

Accepted Answer

According to the quantity theory, the long-run inflation rate is primarily determined by the growth rate of the money supply. When the money supply grows faster than the real output of the economy, the value of each unit of currency decreases, leading to higher prices for goods and services.

Question 15

In the long run, an increase in the money supply will cause real GDP to:
A) increase.
B) decrease.
C) remain constant.
D) deflate.

Accepted Answer

In the long run, an increase in the money supply is typically neutral with respect to real GDP, meaning it does not affect the real output of the economy, but rather affects the price level (inflation). Real GDP is determined by factors such as technology, resources, and labor, not the amount of money in circulation.

Question 16

When economists state that "money is neutral," they mean that the:
A) overall price level has no effect on consumers; only relative prices do.
B) overall price level has no effect on people's inflation expectations.
C) money supply does not affect inflation or nominal GDP.
D) money supply does not affect real GDP or unemployment.

Accepted Answer

The statement that "money is neutral" implies that changes in the money supply do not have an impact on real variables such as real GDP or unemployment in the long run. Instead, changes in the money supply primarily affect nominal variables like the price level.

Question 17

According to the quantity theory of money, money growth in the long run:
A) affects both real GDP growth and inflation.
B) affects real GDP growth only.
C) affects inflation only.
D) has no effect on either real GDP growth or inflation.

Accepted Answer

According to the quantity theory of money, in the long run, there is a direct relationship between the quantity of money and the price level, but no relationship between the quantity of money and real GDP. Therefore, money growth affects inflation only, and not real GDP growth.

Question 18

The quantity theory of money predicts that the main cause of inflation is increases in:
A) prices.
B) real output.
C) consumption.
D) the money supply.

Accepted Answer

The quantity theory of money states that inflation is primarily caused by increases in the money supply. This is because when there is more money in circulation, each unit of currency is worth less, leading to higher prices. Increases in real output or consumption may also have an impact on inflation, but these are generally considered secondary factors. Therefore, the best choice is D.

Question 19

According to the quantity theory of money, the primary cause of inflation is:
A) the growth rate of the money supply.
B) the growth rate of real GDP.
C) productivity growth.
D) the number of real economic shocks.

Accepted Answer

The quantity theory of money states that the primary cause of inflation is the growth rate of the money supply. This theory asserts that there is a direct relationship between the amount of money in circulation and the level of prices. When the money supply grows faster than the rate of real GDP growth, there is excess money available in the economy, which drives up prices. Therefore, increasing the money supply is likely to lead to inflation.

Question 20

Deflation is a decrease in the:
A) exchange rate.
B) average level of prices.
C) inflation rate.
D) velocity of money.

Accepted Answer

Deflation refers to a decrease in the average level of prices, which means that goods and services become cheaper over time. This is the opposite of inflation, which refers to an increase in the average level of prices. Deflation can occur due to various reasons such as reduced demand, increased productivity, or a decrease in the money supply.

Quiz 12: Inflation and the Quantity Theory of Money

The quantity theory states that money is neutral:

Suppose real GDP and velocity of money remain constant. If money supply doubles, then the inflation rate will be:

Disinflation is a decrease in the:

Between 1960 and 1990, Argentina's money supply grew at approximately 80%. According to the quantity theory of money, inflation rates in Argentina should have been approximately _____ during this period.

The quantity theory of money predicts that the price level:

If the growth rate of the money supply decreases from 10% to 5%, which of the following is a prediction of the quantity theory of money?

The quantity theory of money assumes that real GDP:

The quantity theory of money:

In times of financial panic, we expect the velocity of money to:

According to the quantity theory of money, a change in the money supply affects:

Disinflation occurs when the overall price level:

If the money supply in a country is $200 million, the velocity of money is 5, and real GDP is 250 million, the price level of the country must be:

Suppose the nominal GDP of a country is $500 billion. If the velocity of money in the country is 10, then the country's money supply will equal:

According to the quantity theory, what causes inflation in the long run?

In the long run, an increase in the money supply will cause real GDP to:

When economists state that "money is neutral," they mean that the:

According to the quantity theory of money, money growth in the long run:

The quantity theory of money predicts that the main cause of inflation is increases in:

According to the quantity theory of money, the primary cause of inflation is:

Deflation is a decrease in the: