How is the quantity theory of money different from the quantity equation, and why must the quantity equation always be true?
What will be an ideal response?
The quantity equation is that the money supply (M) times the velocity of money (V) equals the price level (P) times real GDP (Y), or MV = PY. The quantity equation must always be true because the definition of the velocity of money is PY/M. If PY/M is substituted for V, the quantity equation yields PY = PY.
The quantity theory of money is a theory derived from the quantity equation by Irving Fisher, who asserted that the velocity of money is fixed. The theory can be judged as true or not true.
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The consumption function shows the relationship between consumption and:
a. interest rates. b. saving. c. price level changes. d. disposable income.
Positive externalities can be more easily measured than negative externalities
Indicate whether the statement is true or false
Conventional budget accounting practices tend to overstate deficits in inflationary periods because they
A. ignore the inflation tax. B. confuse repayment of principal with real interest expenditures. C. double count some expenditures. D. understate real interest rates.
You are in the market for a used 2016 Toyota Corolla. You know that half of the 2016 Corollas are lemons and half are peaches. If you could be assured that the Corolla you were buying was a peach, you would be willing to pay up to $12,000. On the other hand, you would only be willing to pay $4,000 for a lemon. You have no ability to discern whether any particular Corolla is a lemon or a peach. Sellers of Corollas, on the other hand, are likely to know whether their particular car is a lemon or a peach. Suppose sellers of lemons will sell their cars for $3,000 or more and peach sellers will be willing to sell their cars for $9,000 or more. Over time the price in the market for 2016 Corollas will
A. be between $9,000 and $12,000 and only peaches will be traded. B. be between $3,000 and $12,000 and both lemons and peaches will be traded. C. be between $3,000 and $4,000 for lemons and only lemons will be traded. D. be between $9,000 and $12,000 for peaches and between $3,000 and $4,000 for lemons and both lemons and peaches will be traded.