The equation of exchange which is MV = PY is an identity, which means it is true by definition. If you think carefully, what variable in the equation by the way it is defined really makes the equation of exchange an identity?
What will be an ideal response?
It is the velocity of money. It is defined as PY/M. Since it is defined this way, (nominal GDP divided by the money aggregate) any values of P, Y or M will make the equation true.
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The multiplier that arises from equal increases in government spending and taxes is called the
A) balanced budget multiplier. B) simple multiplier. C) tax multiplier. D) government spending multiplier.
A tax imposed on the part of income that households spend is known as a
a. luxury tax b. flat tax c. consumption tax d. income tax e. value tax
If the marginal tax rate is too high, it can cause all of the following except
A. Government tax receipts to decline. B. Work effort to decrease. C. Businesses to produce more. D. The rate of saving to decline.
Smyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $50 million, which it could have maintained if Jones Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually. The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit). One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $1 billion. Ignoring antitrust concerns, compute the present value of Smyth Industries' profits if it remains a duopolist in this market when the interest
rate is 5 percent. A. $210 million B. $1.05 billion C. $200 million D. $100 million