Question

181) Consider an economy where the growth rate of real GDP is 6% and the growth rate of money supply is 8%. If the quantity theory of money holds, the inflation rate in the economy will be:

181) A) 8%. B) 6%. C) 14%. D) 2%.
182) Consider an economy where the growth rate of money supply is 2% and the inflation rate is 2%. If the quantity theory of money holds, the growth rate of real GDP in the economy will be:

182) A) 0%. B) 4%. C) 2%. D) 1%.

183) The quantity theory of money implies that:

183) A) inflation is equal to the gap between the growth rate of money supply and the growth rate of nominal GDP.

B) inflation is equal to the gap between the growth rate of money supply and the growth rate of real GDP.

C) inflation is equal to the gap between the growth rate of money supply and the current nominal interest rates.

D) inflation is equal to the gap between the growth rate of money supply and the current real interest rates.

184) According to the quantity theory of money:

184) A) when the gap between the growth rate of money supply and the growth rate of real GDP widens, real interest rates increase.

B) when the gap between the growth rate of money supply and the growth rate of real GDP widens, inflation decreases.

C) when the gap between the growth rate of money supply and the growth rate of real GDP widens, inflation increases.

D) when the gap between the growth rate of money supply and the growth rate of real GDP widens, nominal interest rates decrease.

185) Which of the following statements is true of the quantity theory of money?

185) A) The theory explains the relationship between growth in real GDP and changes in nominal interest rates.

B) Predictions of the theory can be verified with data.

C) The theory is applicable only in the short run.

D) The theory states that inflation will always be positive.

Answer 1

As per quantity theory, velocity remaining constant,

% Change in Money Supply = % Change in price level (Inflation) + % Change in real GD

(181) (D)

Inflation rate = Money supply growth rate - Real GDP growth rate = 8% - 6% = 2%

(182) (A)

Real GDP growth rate = Money supply growth rate - Inflation rate = 2% - 2% = 0%

(183) (B)

Inflation rate = Money supply growth rate - Real GDP growth rate

(184) (C)

Since Inflation rate = Money supply growth rate - Real GDP growth rate, higher gap between Money supply growth rate & Real GDP growth rate will increase Inflation rate.

(185) (B)