Question 1

If the equation of exchange is MV = PY the Y represents:

Accepted Answer

Y represents Real GDP, which is the output of goods and services measured at constant prices.

Question 2

Economic researchers have found:

Accepted Answer

High rates of money growth typically lead to high inflation rates, as more money in circulation can decrease its value, leading to price increases.

Question 3

History proves that:

Accepted Answer

This is known as the quantity theory of money, which states that there is a direct relationship between changes in the quantity of money in an economy and changes in prices, leading to inflation. Therefore, countries with high rates of money growth will have higher rates of inflation.

Question 4

Over the long run if central banks want to avoid high rates of inflation, they need to be concerned with the:

Accepted Answer

The money growth rate is the rate at which the money supply is increasing. If the central bank allows the money supply to grow too quickly, it can lead to higher rates of inflation over the long run. Therefore, central banks need to be concerned with controlling the money growth rate to avoid high inflation rates. While the other options may indirectly affect inflation, they are not as directly related as the money growth rate.

Question 5

If M2 is four times larger than M1, the velocity of M1 should be:

Accepted Answer

If M2 is four times larger than M1, for momentum to be conserved, the velocity of M1 should be four times larger than the velocity of M2.

Question 6

For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing:

Accepted Answer

The period following the collapse of the Soviet Union in 1990 was marked by extremely high rates of inflation in many of the former Soviet countries. This was due to a combination of factors such as the transition to market economies, currency devaluation, and economic instability.

Question 7

If M = the money supply; Y = real output, P = the price level, and V = velocity, which of the following equals the velocity of money?

Accepted Answer

The velocity of money (V) is calculated as the ratio of nominal GDP (P x Y) to the money supply (M), which is represented by (P x Y)/M.

Question 8

Consider the following ratio: the average annual inflation rate/the average annual money growth rate.A country with a ratio less than one would have:

Accepted Answer

A ratio less than one means that the average annual inflation rate is less than the average annual rate of money growth. This indicates that the country is likely to have a relatively stable economic environment with low inflation and a healthy rate of money growth.

Question 9

Which of the following expresses the equation of exchange?

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. This equation shows the relationship between the money supply, the velocity of money, the price level, and real output.

Question 10

Consider the following ratio: the average annual inflation rate/the average annual money growth rate.If a country's rate of money growth consistently exceeds the rate of inflation the ratio would be:

Accepted Answer

If the rate of money growth consistently exceeds the rate of inflation, then the average annual inflation rate will be lower than the average annual money growth rate. This means that the ratio (inflation rate/money growth rate) will be less than one.

Question 11

The velocity of money increases if:

Accepted Answer

The velocity of money is the frequency at which money is spent in the economy. Thus, if each unit of money is used more frequently, the velocity of money will increase.

Question 12

Using the equation of exchange, if inflation is 1.5%, real output grows by 3.0%, and the growth rate of money is 5.0%, the change in the velocity of money is:

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 (inflation), and Q is the real output. The growth rates of these variables add up, so if inflation (P) is 1.5%, real output (Q) grows by 3.0%, and the growth rate of money (M) is 5.0%, then the change in the velocity of money (V) must balance the equation. 5.0% (M) + X% (V) = 1.5% (P) + 3.0% (Q). Solving for X gives X = -0.5%, meaning the velocity of money decreases by 0.5%.

Question 13

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 14

The velocity of money equals:

Accepted Answer

The velocity of money is calculated as Nominal GDP divided by the money supply, indicating how frequently money circulates in the economy.

Question 15

If money were valued in terms of how many minutes a person needs to work to buy a dollar, an increase in the number of minutes of work needed would be:

Accepted Answer

An increase in the number of minutes of work needed to buy a dollar would mean that money has become more expensive, as it now takes more time and effort to earn the same amount of money. Therefore, the price of money has increased.

Question 16

If we look at the value of money in terms of how many units of a good it takes to buy one dollar, then inflation means:

Accepted Answer

The answer of If we look at the value of...

Question 17

For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing extremely high rates of inflation.To solve this problem, a number of countries:

Accepted Answer

Turning the authority to print money over to an independent central bank would ensure that the government cannot print excess money to cover its expenses, thus reducing the risk of inflation. Imposing price controls may lead to shortages and black markets, while devaluing the currency and returning to a gold standard may have unpredictable effects on trade and international relations.

Question 18

When the currency loses value, causing people to spend it more quickly, this:

Accepted Answer

When people spend money more quickly due to its decreasing value, it increases the velocity of money, which can have the same effect on inflation as an increase in money supply, leading to higher prices.

Question 19

According to the equation of exchange, if real output and the money supply stay the same and the price level increases:

Accepted Answer

According to 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 real output. If Q and M stay constant and P increases, then V has to increase to maintain the equation of exchange. This means that each unit of money is being spent more frequently, which could be a result of higher inflation or greater economic activity.

Question 20

Inflation can be thought of as:

Accepted Answer

Inflation is a decrease in the purchasing power of money, meaning that the same amount of money can buy fewer goods and services than before. This is caused by an increase in the supply of money relative to the demand for goods and services. Therefore, option B is the correct answer. Option A is incorrect because the price of money does not change, and options C and D do not accurately describe the cause and effect relationship of inflation.

Quiz 20: Money Growth, Money Demand, and Modern Monetary Policy