Question

1.

In the equation of exchange, the term P × Q is the same as:
	the money supply. nominal GDP. national income. real GDP.

2.T

he idea that a change in the money supply would affect prices but not real GDP is associated with the:
	monetary equivalence theory. GDP impossibility rule. classical monetary transmission mechanism. law of unintended consequences.

3.

The idea that a change in the money supply would affect prices but not real GDP is associated with the:

	monetary equivalence theory.
	GDP impossibility rule.
	classical monetary transmission mechanism.
	law of unintended consequences.

Answer 1

1) b is the right option

The term PXQ same as nominal GDP

The equation of exchange is an identity that states that

M × V ≡P × Q,

• where M = the money supply (usually thought of as M1), V = the velocity of money, P = the price level, Q = real output, or Real GDP, and the symbol ≡ means "must be equal to." Velocity is the average number of times a dollar is spent to buy final goods and services in a year. We measure velocity by dividing nominal GDP by the money supply, that is:

• V ≡ GDP/M

The equation of exchange can be interpreted in three different ways:

• 1. The money supply multiplied by velocity must equal the price level times Real GDP.

• 2. The money supply multiplied by velocity must equal GDP.

• 3. Total spending (measured by MV) must equal the total sales revenues of business firms (measured by PQ).

2) c is the right option

The idea that a change in the money supply would affect prices but not real GDP is associated with the:Classical monetary transmission mechanism.

• 1. liquidity trap, a rise in the money supply will not affect interest rates and therefore will not affect investment or the goods and services market. market can affect the goods and services market only indirectly.

• 2. if the money market is not in the liquidity trap, a rise in the money supply affects the goods and services market not directly, but indirectly: The rise in the money supply lowers the interest rate, causing investment to rise (assuming investment is not interest insensitive). As investment rises, the AD curve shifts rightward, affecting the goods and services market. In other words, there is an important intermediate market between the money market and the goods and services market in the Keynesian transmission mechanism. Thus, the money market can affect the goods and services market only indirectly.

3) c is the right option

The idea that a change in the money supply would affect prices but not real GDP is associated with the:classical monetary transmission mechanism.