Question 1

Which of the following is true?

Accepted Answer

Velocity is affected by various factors such as changes in economic behavior, technology, and institutional structures, which can cause it to fluctuate over time. The other options are not true.

Question 2

If M increases faster than V decreases:

Accepted Answer

According to the equation of exchange (MV = PQ), if M increases faster than V decreases, then the product of MV will increase. Since M represents the money supply and V represents the velocity of money, an increase in the product of MV means there is more money circulating in the economy. This increase in money supply will result in an increase in nominal GDP (PQ).

Question 3

If unemployment is the major problem in the economy, which of the following would be an appropriate monetary policy response?

Accepted Answer

Decreasing the discount rate would encourage banks to borrow more money from the central bank, making it easier for them to lend to customers, which would likely lead to increased investments in the economy and potentially decrease unemployment. Decreasing taxes or selling government bonds may also have some impact on the economy, but they are not directly linked to addressing unemployment as monetary policy tools.

Question 4

An increase in the money supply:

Accepted Answer

An increase in the money supply will lead to inflation if the economy is fully employed because there will be more money chasing the same amount of goods and services, resulting in higher prices. This is also known as demand-pull inflation. However, if unemployment is high and there is much unused industrial capacity, the economy is not at its full potential, and the increase in the money supply may not lead to inflation. Therefore, choice A is not the best answer. Choice B is incorrect because an increase in the money supply will shift the aggregate demand curve to the right, not the left. Choice D is also incorrect because an increase in the money supply will typically lead to lower interest rates, not higher.

Question 5

An increase in M or an increase in V, other things equal, would definitely increase:

Accepted Answer

An increase in M (money supply) or V (velocity of money) would increase nominal GDP (P x Y) as per the equation of exchange. Real GDP (Y) would only increase if the increase in nominal GDP is due to an increase in productivity or output. The price level (P) may or may not increase depending on other factors like supply and demand in the market. Unemployment (not mentioned in the equation of exchange) may or may not be affected by an increase in M or V.

Question 6

An increase in the interest rates will

Accepted Answer

When interest rates increase, holding money becomes more costly because individuals miss out on the higher interest they could earn by depositing their money. As a result, people tend to hold less money and circulate it more quickly, leading to an increase in the velocity of money.

Question 7

If velocity is growing by 2 percent per year and real output is growing 6 percent per year, according to the equation of exchange, in order to maintain stable prices, the money supply would have to:

Accepted Answer

The equation of exchange is MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. If we assume that the price level is constant, then we can rearrange the equation to be M = (PY)/V. If velocity is growing by 2 percent per year and real output is growing by 6 percent per year, we can say that V = 1.02 and Y = 1.06. So, in order to maintain stable prices, we need to increase the money supply by (1.06/1.02) = 1.039, or by 3.9 percent. However, this is not one of the answer choices. The closest choice is B, which suggests that the money supply needs to grow by 4 percent. This is not exactly correct, but it is the closest answer choice available.

Question 8

If the money supply grew by 6 percent and velocity fell by 2 percent, nominal GDP would:

Accepted Answer

The equation for nominal GDP is MV=PQ, where M is the money supply, V is velocity, P is the price level, and Q is real GDP. If M grows by 6% and V falls by 2%, then MV will still increase by 4%. This means that nominal GDP will rise by 4%.

Question 9

In order to determine the velocity of money, we need to know:

Accepted Answer

The velocity of money is the number of times money changes hands in a given period. To calculate it, we need to know the money supply and the nominal GDP of an economy. Therefore, choice C is the best option as it includes both required inputs. The price level (choice A) and interest rate (choice D) may affect the velocity of money, but they are not directly involved in the calculation. Real GDP (choice B) is necessary to calculate the GDP deflator, which can be used to calculate the price level, but it is not needed to determine the velocity of money.

Question 10

In the equation of exchange, an increase in M of 8 percent could be accompanied by changes in velocity, the price level and real GDP of:

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 real GDP. If M increases by 8%, then either V, P, or Q must also change in order to keep the equation in balance.Choice A is the only choice that satisfies the equation of exchange. If M increases by 8%, then V must decrease by 2%, P must increase by 3%, and Q must increase by 3% in order to keep the equation in balance.

Question 11

If the money supply increased by 4 percent and velocity increased by 4 percent:

Accepted Answer

The quantity theory of money states that MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output (GDP).

Given that M increases by 4% and V also increases by 4%, then we can assume that P and Y remain constant. Thus, combining the equation we have:

4% (M) + 4% (V) = P (0) + Y (0)

Solving for Y:

Y = (4% M + 4% V) / 0

Y = 8%

Therefore, nominal GDP would increase by 8%.

Question 12

If M increases and V decreases:

Accepted Answer

It is not possible to determine the effect on nominal GDP without additional information about how the changes in M and V relate to each other and to other macroeconomic factors such as prices and output.

Question 13

Velocity can be defined as:

Accepted Answer

Velocity is commonly defined as the rate at which money changes hands in an economy, or the turnover rate of money - how quickly money circulates through the economy. This definition is the same as Choice A. The other choices are not accurate definitions of velocity.

Question 14

In the equation of exchange, PQ represents:

Accepted Answer

PQ in the equation of exchange represents the dollar value of all final goods and services sold in a country in a given year, which is essentially the definition of nominal GDP.

Question 15

The equation of exchange states that:

Accepted Answer

The equation of exchange is represented by the formula MV = PQ, where M stands for the money supply, V is the velocity of money, P is the price level, and Q represents the quantity of goods and services produced. This matches choice C, which correctly states that the money supply times the velocity of money equals the price level times the quantity of goods and services produced.

Question 16

If M increases, and V remains constant:

Accepted Answer

The equation M*V = P*Q (where M is money supply, V is velocity of money, P is price level, and Q is quantity of goods and services produced) shows that if M increases and V remains constant, it could lead to an increase in P, an increase in Q, or an increase in both P and Q. Therefore, there is no single outcome that must happen, making D the correct choice.

Question 17

Which of the following is not one variable in 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 output. The interest rate is not a variable in this equation.

Question 18

If V falls faster than M increases:

Accepted Answer

If V falls faster than M increases, then the velocity of money has decreased faster than the money supply has increased. This means that there is less spending in the economy, which leads to a decrease in nominal GDP.

Question 19

If nominal GDP is $954 billion and velocity is 9, then the money supply:

Accepted Answer

The money supply can be calculated using the formula: Money Supply = Nominal GDP / Velocity. Therefore, Money Supply = $954 billion / 9 = $106 billion.

Question 20

In the equation of exchange, velocity will tend to rise when:

Accepted Answer

Velocity tends to rise when the price level rises, real GDP rises, or the money supply falls, as each scenario can lead to more frequent use of money in transactions.

Quiz 16: The Federal Reserve System and Monetary Policy