Question

1.If you use money as a unit of account, you would be

A. buying a new radio.

B. returning a sweater to the department store.

C. searching the Internet for a deal on a new computer.

D.withdrawing $500 from your savings account.

E. putting money in a savings bond.

2.Which of the following will cause velocity to increase?

A.The price of goods increases.

B. The money supply decreases.

C. People get paid more often

.D. Interest rates increase

.E Productivity decreases.

3.

In Drewland, the money supply equals $1,000, real GDP equals $2,000 and the price level is 1.5 then the velocity of money is

A.1.

B. 2.

C. 3.

D.4

E. 5.

Answer 1

(1) Money is unit account. It means money acts as a common unit for measuring the value of every goods and services.

If you use money as unit of account, you would be buying a new radio.

You would buy a new radio when you will have price of radio in common unit i.e., money.

Answer: Option (A)

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(2) According to QTM:

MV = PY

Where, M is money supply.

V is the velocity of money

P is the price level

Y is the Real GDP.

MV = PY

=> V = (PY / M)
So,an increase in price level will increase the velocity.

Note: Velocity of money measures the average number of time money circulates from one person to another. An increase in price level will lead to increase in velocity of money.

And a decrease in money supply will decrease the price level.

Answer: Option (A)

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(3)

MV = PY

=> V = (PY / M)

Where, M is money supply.

V is the velocity of money

P is the price level

Y is the Real GDP.

Calculation:

V = (1.5 * $2000) / $1000

V = $3000 / $1000

V = 3

Velocity of money is 3.

Answer: Option (C)