Question 1

The equation of exchange is

Accepted Answer

The equation of exchange is an accounting identity that represents the relationship between the money supply, velocity of money, price level, and real output. As it is an accounting identity, it is always true by definition.

Question 2

According to the quantity theory of money and prices, a 2 percent increase in the money supply ultimately leads to

Accepted Answer

According to the quantity theory of money and prices, there is a direct relationship between the money supply and the price level in the long run. Therefore, a 2 percent increase in the money supply would lead to a 2 percent increase in the price level. The theory does not suggest any direct impact on real GDP, wages, or velocity.

Question 3

According to the equation of exchange, nominal GDP equals

Accepted Answer

The equation of exchange, often represented as MV = PQ, states that the amount of actual money balances (M) times the income velocity of money (V) equals nominal GDP (PQ), where P represents the price level and Q represents the quantity of goods and services produced in the economy. Therefore, option A correctly describes the relationship between nominal GDP and the components of the equation of exchange.

Question 4

The number of times per year, on average, that a dollar is spent on final goods and services is known as

Accepted Answer

The number of times per year that a dollar is spent on final goods and services is known as the income velocity of money. It is calculated as the nominal GDP divided by the money supply.

Question 5

An increase in the money supply, other things being constant

Accepted Answer

An increase in the money supply leads to more money being available in the economy, which in turn increases the demand for goods and services. Since prices are determined by the supply and demand for goods and services, an increase in the demand for goods and services is likely to result in an increase in the price level.

Question 6

An assumption used in the quantity theory of money is that

Accepted Answer

The assumption used in the quantity theory of money is that velocity is constant. This means that the speed at which money circulates in an economy is assumed to be unchanged over time. This assumption is used to explain the relationship between the money supply and the price level. According to the theory, changes in the money supply will lead to proportionate changes in the price level, with velocity remaining constant.

Question 7

If the total money supply is $3 trillion, real GDP is $9 trillion and the price level is 2, then the equation of exchange tells us that velocity equals

Accepted Answer

The equation of exchange is given by 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. We can rearrange this equation to solve for V as V = PQ/M.

Using the given values, we have:
M = $3 trillion
P = 2
Q = $9 trillion

Substituting these values into the equation, we get:
V = (2)($9 trillion)/($3 trillion) = 6

Therefore, the velocity of money is 6.

Question 8

The income velocity of money is the absolute number of times, on average, that

Accepted Answer

The income velocity of money measures how many times a unit of currency is spent on final goods and services during a given time period. It is calculated as the ratio of nominal GDP to the money supply.

Question 9

The equation of exchange is a formula indicating that the number of monetary units times

Accepted Answer

The equation of exchange is MV = PY, where M is the total amount of money in circulation, V is the velocity of money (the number of times each monetary unit is spent on final goods and services), P is the price level, and Y is real GDP. This equation states that the total amount of money spent on goods and services (MV) is equal to the total value of goods and services produced (PY). Therefore, choice A is the correct option, as it correctly interprets the equation.

Question 10

According to the equation of exchange, if real Gross Domestic Product (GDP) is $25 billion, the money supply is $10 billion, and the price index equals 2, then the income 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, and Q is the real GDP. Given M = $10 billion, P = 2, and Q = $25 billion, we solve for V: V = PQ/M = (2 * 25) / 10 = 50 / 10 = 5.

Question 11

The quantity theory of money is based on the formula that

Accepted Answer

The quantity theory of money is based on the equation of exchange, which is MV = PY. Rearranging for P gives P = MV/Y or P = Ms*V/Y, where Ms is the money supply, V is the velocity of money, Y is real GDP, and P is the price level. Therefore, the correct option is D.

Question 12

The quantity theory of money and prices

Accepted Answer

The quantity theory of money and prices proposes that changes in the money supply lead to proportional changes in the price level. The theory assumes that the velocity of money and real output are constant. The equation of exchange (MV = PQ) is used to demonstrate this relationship, where M is the money supply, V is the velocity of money, P is the price level, and Q is real output. Therefore, D is the correct answer.

Question 13

The identity stating that the total amount spent on final output equals the amount received for final output is known as the

Accepted Answer

The answer of The identity stating that the total amount...

Question 14

In words, the equation of exchange says that

Accepted Answer

The equation of exchange, often represented as MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced, essentially states that the total amount of money spent in an economy (on the left side of the equation) equals the total amount received by producers (on the right side of the equation). This is reflected in choice A, which correctly summarizes the concept by stating that the total amount spent on final output equals the amount received for final output.

Question 15

If nominal GDP is $5 trillion and velocity is 5, then

Accepted Answer

The velocity of money is defined as the rate at which money circulates, changes hands, or turns over in an economy in a given period. It is calculated as the ratio of nominal GDP to the money supply. Given that the nominal GDP is $5 trillion and the velocity is 5, we can calculate the money supply (actual money balances held by the nonbanking public) as $5 trillion / 5 = $1 trillion. Choices C and D are incorrect because they involve real GDP, which cannot be determined from the information given about nominal GDP and velocity alone.

Question 16

Empirical evidence across numerous countries indicates that changes in the ________ are associated with nearly equiproportional changes in ________.

Accepted Answer

The relationship between money supply and price level is known as the quantity theory of money and is supported by empirical evidence from various countries. According to this theory, an increase in the money supply leads to an equiproportional increase in the price level, ceteris paribus. Therefore, changes in the money supply are associated with changes in the price level, not real GDP or income velocity of money.

Question 17

If velocity is equal to 1, this means that

Accepted Answer

Velocity of money measures the average frequency at which a unit of currency is spent within a given period of time. If velocity is equal to 1, it means that each dollar of the money supply is spent on the average one time per year.

Question 18

According to the quantity theory of money

Accepted Answer

The quantity theory of money states that a given proportionate increase in the money supply leads to an equal proportionate increase in the price level. This is because the quantity theory assumes that velocity (the rate at which money changes hands) and real GDP remain relatively constant in the long run. Therefore, the only variable left to explain changes in the price level is the money supply.

Question 19

The quantity theory of money and prices assumes

Accepted Answer

The quantity theory of money and prices assumes that the velocity of money (the rate at which money changes hands) is constant. This relationship is expressed by the equation: M x V = P x Y, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output. If V is assumed to be constant, then any changes in M will lead to proportionate changes in P.

Question 20

The equation of exchange is an ________ while the quantity theory of money is a theory that ________.

Accepted Answer

The equation of exchange is an accounting identity that states that the quantity of money times its velocity is equal to the price level times real output. The quantity theory of money, on the other hand, is a theory that assumes velocity is held constant and explains the relationship between the quantity of money and the price level. Therefore, option B is the correct answer as it states that the equation of exchange is an accounting identity and the quantity theory of money assumes velocity is held constant.

Quiz 16: Domestic and International Dimensions of Monetary Policy