If velocity remains constant, there are three possible scenarios for the quantity theory of money and prices. Give an example for each of these scenarios.
What will be an ideal response?
Examples will vary but should show a thorough understanding of the various scenarios for the quantity theory of money and prices if velocity remains constant. For example, a nation increases its money supply by 10 percent over five years. However, during this time, the nation’s real GDP increased only 6 percent. As a result, the nation would experience inflation. If a nation’s money supply increases by 10 percent and its real GDP increases by 12 percent over five years, then the nation would experience deflation. Finally, if over a period of time, a nation’s money supply and real GDP grow at about the same rate, then the price level will be stable.
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A commercial bank has no excess reserves until a depositor places $5,000 in cash at the bank. The commercial bank then lends $4,000 to a borrower. As a consequence of these transactions, the size of the money supply has
A. increased by $5,000. B. increased by $4,000. C. not been affected. D. decreased by $5,000.
The above figure shows the isoquants for producing steel. When producing more than 20,000 tons there are
A) increasing returns to scale. B) decreasing returns to scale. C) constant returns to scale. D) economies of scale.
The purchasing power parity (PPP) theory suggests the prices of identical items will equalize internationally. An illustration that supports this theory is the fact that the price of a McDonald's "Big Mac" is the same around the world
a. True b. False
Suppose that everyone who has looked for a job for more than six months gave up in despair and stopped looking. What would happen to the unemployment rate? a. It would increase
b. It would fall. c. It would change, but the effect cannot be predicted. d. It would not change.