Question

Suppose that an economy currently has 10% unemployment, a real interest rate of 2%, and a real GDP growth rate of 6%. According to the Quantity Theory, an increase in the money supply of 8% would prices to change by _ %.

Enter a negative sign (-) if your answer requires it. Do not put a % sign in your answer.

2.

Suppose that an economy currently has 10% unemployment, a real interest rate of 4%, and a real GDP growth rate of 8%. According to the Quantity Theory, an increase in the money supply of 3% would prices to change by _ %.

Enter a sign [ -] before you answer if it requires it. Do not put a % sign in your answer.

3.

According to the Quantity Theory, a sudden increase in velocity would cause

a. a bank run
b. inflation
c. deflation
d. a recession or depression
e. disintermediation
f. the bankruptcy of the Federal Reserve

4.

What does the Quantity Theory of Money argue about velocity, or how did they treat velocity during “normal” times (i.e., not during hyperinflations)?

a. They calculated velocity as the inverse of the unemployment rate

b. They calculated velocity as the ratio of real GDP to nominal GDP

c. They treated velocity as an ever-changing magnitude whose actual size was unknowable

d. They treated velocity as a magnitude that changed slowly over time, but it did not change simply because the money supply changed

e. They treated velocity as a never-changing constant

f. They calculated velocity as the inverse of the reserve requirement

5.Suppose an economy has nominal GDP of $480 billion, a money supply of $60 billion, an interest rate of 7%, and an unemployment rate of 8%. What is its velocity?

6.

What did (do) Mercantilists and Neo-mercantilists think was (is) the proper role for government to play in the economy?

a. Laissez-faire
b. Make sure that markets are free and open
c. Prosecute all monopolies
d. Promote and protect domestic firms from foreign competition
e. Keep wages low in order to increase the profits of the ruling class

7.

Do Neo-mercantilists advocate bullionism?

a. Only when they are arguing for free trade
b. Only when they are reducing the money supply
c. Yes
d. No
e. Only on Sundays

f. Make sure that everyone can watch baseball on TV

Answer 1

1).

According to the quantity theory of money (QTM), the following relation holds.

=> M*V = P*Y, where “M=money supply”, “V=velocity of money”, “P=price level” and “Y=GDP”. The above QTM equation can also be written as.

=> Gm + Gv = Gp + Gy, where “Gm=growth of money supply”, “Gv = growth of velocity of money”, “Gp=inflation” and “Gy=GDP growth”.

=> Gp = Gm + Gv – Gy.

Now, usually in the normal time the velocity of money remains same, => “Gv=0”. So, if “Gy=6%” and “Gm=8%”, implied the inflation rate is.

=> Gp = Gm + Gv – Gy, => Gp = 8% – 6% = 2%, => Gp = 2%. So, the price would increases by 2%.

2).

Now, let’s assume the GDP growth is 8% and the money supply increases by 3%, => the inflation rate is.

=> Gp = Gm + Gv – Gy, => Gp = 3% – 8% = (-5%), => Gp = (-5%). So, the price would change by (-5%).

3).

The QTM equation can be written as.

=> Gp = Gm + Gv – Gy, => as the velocity of money increases implied Gv increases that also increase the Gp, => higher inflation. So, the correct answer is “B”.

4).

Usually the “V=velocity of money” doesn’t change, => “V” is constant, => Gv = 0. So, the correct answer is “E”, that is “a never changing constant”.