Discuss the quantity theory of money. Be sure to mention the velocity of circulation and the equation of exchange
What will be an ideal response?
The quantity theory of money is the proposition that in the long run an increase in the money supply leads to an equal percentage increase in the price level. The velocity of circulation is defined as the average number of times a dollar is used annually in exchange for goods and services. Because GDP is the total of all goods and services purchased, we can derive a formula for the velocity of circulation from GDP. If we use Y for real GDP and P as the price level, the PY = nominal GDP. Because the money supply is used to purchase GDP, velocity, V, equals (PY)/M, where M is the quantity of money. This formula can be rearranged to become the equation of exchange, which states that MV = PY. Given the assumptions that neither velocity nor potential GDP are influenced by the quantity of money, we can then solve for the price level as P = (MV/Y). Given the assumptions then, changes in the quantity of money lead to only changes in the price level. The quantity theory states that in the long run the percentage increase in the quantity of money equals the percentage increase in the price level.
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By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest totaling $436 one year later
During the year the CPI rose from 150 to 162, but he had thought the CPI would be at 159 by the end of the year. By Marks had expected the real interest rate to be ________, but it actually turned out to be ________. A) 8%; 1% B) 6%; 3% C) 3%; 1% D) 1%; 3%
Which of the following statements about monetary policy is correct?
a. Whatever happens with aggregate supply and aggregate demand in the long run, monetary policy can be used to prevent inflation from becoming entrenched in the economy in the short and medium term. b. Whatever happens with aggregate supply and aggregate demand in the short run, monetary policy can be used to prevent inflation from becoming entrenched in the economy in the medium and long term. c. Whatever happens with aggregate supply and aggregate demand in the short and medium run, monetary policy can be used to prevent inflation from becoming entrenched in the economy in the long term. d. Whatever happens with aggregate supply and aggregate demand in the medium and long run, monetary policy can be used to prevent inflation from becoming entrenched in the economy in the short term.
Ch 1.The opportunity cost of an action is best defined as which of the following?
What will be an ideal response?
The higher the marginal propensity to consume, the
a. smaller the size of the multiplier. b. larger the size of the multiplier. c. larger the propensity to save. d. larger the velocity.