2. Consider the following two claims: Claim 1: Because the velocity of money is usually stable...

2. Consider the following two claims:

Claim 1: Because the velocity of money is usually stable over time when the money supply is increased, there is a proportionate change in the nominal value of output as measured by nominal GDP.

Claim 2: Real GDP is primarily determined by the amount of labor, physical capital, human capital and natural resources, as well as the available production technology.

Which of the following statements is most accurate?

a. If claims 1 and 2 are both accurate, then an increase in the money supply must cause a proportionate decrease in the price level.

b. None of these answers

c. If claims 1 and 2 are both accurate, then an increase in the money supply must cause a proportionate increase in the price level.

d. If claims 1 and 2 are both accurate, then when real GDP rises the price level must also rise.

Solutions

Expert Solution

"C"

If claim 1 and 2 are both accurate then an increase in the money supply must cause a proportionate increase in the price level in the market.

We go by a simple quantity theory of money that MV=PY that is money and velocity is equal to the price and real output. keeping real output and velocity stable any increase in the money supply will proprtionately increase the price level. not the other way round.

Rahul Sunny answered 2 years ago

Next > < Previous

Related Solutions

Suppose in the country A, the velocity of money in the country A is always stable....

Suppose in the country A, the velocity of money in the country A is always stable. Answer the following questions: a. What is the quantity equation? (Please indicate and explain each variable) (2%) b. Suppose the price level in the period t-1 is Pt-1, and the price level In the period t is Pt in the country A.Please use Pt and Pt-1to represent the inflation rate during the period t-1 and the period tin the country A. (2%) c. Suppose...

You have learned that money velocity is rather stable. Assume for simplicity that the velocity is...

You have learned that money velocity is rather stable. Assume for simplicity that the velocity is constant (the quantity theory of money). Explain how the growth in the money supply and inflation are related.

1. Define velocity of money and discuss the major determinants of velocity. 2. Assume GDP is...

1. Define velocity of money and discuss the major determinants of velocity. 2. Assume GDP is currently $8,376 billion per year and the quantity of money is $698 billion. What is the velocity of money? The nation collectively holds enough money to finance how many days worth of GDP expenditure? 3. If bank A borrows $10 million from bank B, what happens to the reserves in bank A? In the banking system? Please explain. 4. If bank A borrows $10...

Consider the following table: Year Quantity of Money (billions of $) Velocity Real GDP (billions of...

Consider the following table: Year Quantity of Money (billions of $) Velocity Real GDP (billions of 2009 $) GDP Deflator 2006 $1,369 10.274 $14,717 2009 $1,684 8.650 1.002 2012 $2,434 6.696 $15,384 Fill in the missing data, using the quantity equation of money. Why might velocity change in this way? Calculate the average inflation rate between 2006 and 2009 and between 2009 and 2012. If velocity had remained at the 2006 level, what would the deflator have been in 2009...

Exercise 1. Consider two economies in which the population is stable; they are identical in every...

Exercise 1. Consider two economies in which the population is stable; they are identical in every respect except that households in economy A save more of their income than households in economy B. How will these economies differ in terms of the level of output, labour productivity, and the growth rates of output and productivity? Explain. Now consider countries C and D, both identical except that firms in country C allocate more resources to research and development (which tends to...

Determine the two assumptions for the following claim: America should fight with drones because it puts...

Determine the two assumptions for the following claim: America should fight with drones because it puts fewer American soldiers at risk.

1. According to the quantity theory of money, if velocity of money is constant, a 5...

1. According to the quantity theory of money, if velocity of money is constant, a 5 percent increase in money supply will lead to a 0.25 percent increase in nominal GDP. a. True b. False 2. According to the equation of exchange, if the amount of money in an economy multiplied by the velocity of money equals 800 million dollars, then this economy's: a. nominal GDP equals $800 million. b. nominal GDP equals $800 million times the price level. c....

Consider the following information on returns and probabilities: Invest 1/2 of your money in Asset A...

Consider the following information on returns and probabilities: Invest 1/2 of your money in Asset A and 1/2 in Asset B. State Probability A B Boom .25 12% 4% Bust .75 6% 18% what is the standard deviation of the return on the portfolio? a. 1.7 b. 2.9 c. 3.9 d. 4.6 e. 5.5 f. 6.9 g. 7.5 h. 9.0 i. 8.2 j. 11

which of the following would cause a decrease in the velocity of money?

1. Suppose in the country A, the velocity of money in the country A is always...

1. Suppose in the country A, the velocity of money in the country A is always stable. Answer the following questions: a. What is the quantity equation? (Please indicate and explain each variable) (2%) b. Suppose the price level in the period t-1 is Pt-1, and the price level in the period t is Pt in the country A. Please use Pt and Pt-1 to represent the inflation rate during the period t-1 and the period t in the country...

Subjects