Question 1

Evidence concerning hyperinflation indicates a clear link between the money supply and the price level for

Accepted Answer

All three countries, Austria, Hungary, and Poland, experienced hyperinflation in the 1920s, and there is clear evidence linking the money supply to the price level in each case.

Question 2

Which of the following is consistent with the idea that high money supply growth leads to high inflation?

Accepted Answer

The quantity theory of money states that an increase in the money supply leads to a proportional increase in the price level. The evidence from four hyperinflations during the 1920s, such as in Germany and Hungary, supports this idea. In these cases, high money supply growth led to rapid inflation and eventually hyperinflation.

Question 3

There is evidence that the rate at which money changed hands rose during the German hyperinflation. This means that

Accepted Answer

The answer of There is evidence that the rate at...

Question 4

If money is neutral and velocity is stable, an increase in the money supply creates a proportional increase in

Accepted Answer

The answer of If money is neutral and velocity is...

Question 5

Suppose that M is fixed. According to the quantity equation, which of the following would make the price level higher?

Accepted Answer

The answer of Suppose that M is fixed. According to...

Question 6

Suppose over some period of time the money supply tripled, velocity doubled, and real GDP doubled. According to the quantity equation the price level is now

Accepted Answer

The quantity equation is MV = PQ, where M is the money supply, V is velocity, P is the price level, and Q is real GDP. If the money supply tripled and velocity doubled, the left-hand side of the equation becomes 3*2*MV = 6MV. Since real GDP also doubled, the right-hand side becomes 2PQ. Equating the two sides gives us 6MV = 2PQ, or P = (6MV)/(2Q) = 3*(MV/Q). Since MV/Q is the nominal GDP, which must equal PQ at equilibrium, P must be 3 times its old value.

Question 7

According to the assumptions of the quantity theory of money, if the money supply decreases by 7 percent, then

Accepted Answer

The answer of According to the assumptions of the quantity...

Question 8

Suppose that velocity rises while the money supply stays the same. It follows that

Accepted Answer

According to the equation of exchange (MV = PY), if velocity (V) increases while the money supply (M) stays the same, then the product of price level (P) and real output (Y) must rise to maintain the equality. This means that either prices or real output (or both) must increase. Therefore, choice A is the correct option.

Question 9

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

Accepted Answer

The answer of According to the assumptions of the quantity...

Question 10

Suppose that M is fixed but that P falls. According to the quantity equation which of the following could both by themselves explain the decrease in P?

Accepted Answer

According to the quantity equation, MV = PY. If M is constant and P falls, either V or Y must have decreased. If Y fell, there would be less demand for money, causing interest rates to fall and possibly increasing V. If V rose, there would be an increase in the velocity of money, causing P to fall. Therefore, the only option that could explain the decrease in P is if Y rose and V fell.

Question 11

The evidence from hyperinflations indicates that money growth and inflation

Accepted Answer

The evidence from hyperinflations indicates that money growth and inflation are positively related, which is consistent with the quantity theory of money. This theory states that the general price level is directly proportional to the money supply in an economy, meaning that an increase in the money supply will lead to higher prices (inflation) if other factors remain constant. This has been observed in hyperinflationary episodes, where excessive money creation by governments has led to extremely high rates of inflation.

Question 12

Suppose over some period of time the money supply tripled, velocity was unchanged, and real GDP doubled. According to the quantity equation the price level is now

Accepted Answer

According to the quantity equation MV = PY, if M (money supply) triples and V (velocity) remains unchanged, and Y (real GDP) doubles, then the equation becomes 3M = P * 2Y. Rearranging this equation to solve for P, we get P = (3M) / (2Y). Since M has tripled and Y has doubled, we get P = 3/2 = 1.5 times the old value. Therefore, the correct answer would be B) 3 times its old value.

Question 13

The data on hyperinflation show a clear link between the quantity of money and

Accepted Answer

Hyperinflation refers to a situation where the price level increases rapidly and uncontrollably, often driven by an excessive increase in the quantity of money. Therefore, there is a clear link between the quantity of money and the price level. Choices B, C, and D may also be affected by changes in the quantity of money, but they are not directly related to hyperinflation.

Question 14

If when the money supply changes, real output and velocity do not change, then a 2 percent increase in the money supply

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 output. If Y and V remain constant and the money supply (M) increases, then P must increase by the same percentage as M. Therefore, a 2 percent increase in the money supply will lead to a 2 percent increase in the price level.

Question 15

Suppose the money supply tripled, but at the same time velocity doubled and real GDP was unchanged. According to the quantity equation the price level

Accepted Answer

The answer of Suppose the money supply tripled, but at...

Question 16

Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory,

Accepted Answer

According to the Quantity Theory of Money, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. In this scenario, we know that V is constant and Y is growing at a rate of 3% annually. Therefore, if M is growing at a rate of 8% annually, we can solve for the rate of inflation:

(8%) + (constant V%) = (3%) + (P%)

P% = 5%

So, inflation averaged 5% per year.

To calculate the real rate of return, we can use the Fisher Equation:

Nominal Interest Rate - Inflation Rate = Real Interest Rate

(9%) - (5%) = 4%

Therefore, the real rate of return was 4%.

Thus, the correct answer is C.

Question 17

Suppose monetary neutrality holds and velocity is constant. A 4 percent increase in the money supply

Accepted Answer

According to the quantity theory of money, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. If velocity is constant and monetary neutrality holds, then a 4 percent increase in the money supply will lead to a 4 percent increase in nominal GDP (MV = PY). Since real GDP is assumed to be fixed in the short run, the entire increase in nominal GDP will reflect a proportional increase in the price level (P). Therefore, the correct answer is B, which states that the increase in the money supply will increase the price level by 4 percent.

Question 18

Which of the following is not implied by the quantity equation?

Accepted Answer

The answer of Which of the following is not implied...

Question 19

According to the quantity theory of money, a 3 percent increase in the money supply

Accepted Answer

According to the quantity theory of money, if the nominal money supply increases, the level of prices must eventually rise by the same percentage. Therefore, a 3 percent increase in the money supply will cause the price level to rise by 3 percent.

Question 20

During the 1970's, U.S. inflation averaged 7% each year and real GDP increased. Holding velocity constant and using the Quantity Equation, we conclude that

Accepted Answer

According to the Quantity Equation, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. If we assume velocity is constant, then an increase in the money supply (M) will result in an increase in nominal GDP (PY). Since real GDP increased during the 1970s, we know that nominal GDP also increased. However, if inflation averaged 7% each year, this means that prices (P) were also increasing. Therefore, we can conclude that money growth (M) must have been greater than the growth of real income (Y) in order for inflation to occur. Thus, choice A is correct. Choices C and D are incorrect because we know that prices and output both increased during this time period. Choice B is also incorrect because it assumes that money growth was less than the growth of real income, which is not consistent with the high inflation rate.

Quiz 30: Money Growth and Inflation