Question

The constant velocity of money in the quantity equation implies that any increase in the money supply has to lead directly to:

Multiple Choice

• an increase in Y.

• an increase in V.

• an increase in P.

• a decrease in P.

The severe oil shortages of the 1970s in the US created:

Multiple Choice

• an increase in the velocity of money.

• demand pull inflation.

• a recession.

• cost push inflation.

A financial bubble starts to inflate when:

Multiple Choice

• a good experiences an unexplained rise in demand increasing its price.

• investors become irrationally optimistic that an asset's price will continue to rise.

• investors become irrationally pessimistic that an asset needs to be sold immediately.

• inflation begins to accelerate, and monetary and fiscal policy are ineffective at slowing its growth.

If the efficient-market hypothesis is true, then the idea of:

Multiple Choice

• herd instinct holds.

• tulip mania doesn't always hold.

• tulip mania holds.

• herd instinct doesn't always hold.

Answer 1

1.  The quantity theory of money is given as M*V = P*Y

With V (velocity) being constant and nominal GDP given for a year, there comes a direct relationship between money supply and price level in the economy. Thus, as M increases (with V constant), there is an increase in P (price).

Correct answer : an increase in P

2.  The oil shortage in US during the 1970s was caused due to OPEC countries raising oil prices. The demand for oil was constant but the shortage created due to cut in supply of oil due to rising cost of production led to 'cost push inflation' in the economy. This concept calls for no change in demand while a shortage of supply due to rising costs which happened during the 1970s.

Correct answer : cost push inflation

3.  A financial bubble starts to inflate when there is a trade between amongst market investors for an asset at a price higher than the asset's actual value. There is a belief that the asset's price will go on increasing and the bubble starts building.

Correct answer : investors become irrationally optimistic that an asset's price will continue to rise

4.  Efficient market implies rationality of market participants to react according to market fluctuations. There is adequate adjustments to react market equilibrium. Thus, there is no individual who follows the crowd and optimises his/her decisions according their own expectations.

Correct answer : herd instinct doesn't always hold