5.3 Money Growth and Inflation

Inflation results from ______ the money supply at too rapid a rate for a sustained period of time

• Increasing

• Decreasing

Deflation results from ______ the money supply at too rapid a rate for a sustained period of time

• Increasing

• Decreasing

When the economy is at full-employment, changes in the money supply have _____ effect on real output in the long-run

• A positive

• A negative

• No

In the long-run, the growth rate of money supply determines the growth rate of the _____ according to the quantity theory of money

• price level (inflation)

• RGDP

• nominal interest rate

• real interest rate

Match the following

• M

• Price level

• P

• M1 or M2 Money Supplies

• Q or Y

• Nominal GDP

• PQ or PY

• Real GDP

• V

• Income velocity of money

If MV = PQ, then V = ???

• PQ/M

• M/PQ

If income velocity is held constant, then MV =

• PQ

• P

• Y

In the long-run, which variable is independent of MV?

• Real GDP (P)

• Nominal GDP

• Price Level

Answer explanation

Real GDP is independent of MV in the long-run. This implies that holding velocity constant (acceleration = 0), changes in M1 result in direct changes in the price level

Assuming that income velocity is contant, and that the RGDP is growing at an annual rate of 3%, what would happen if the M1 grew by 5% during the same year?

• P increases 5/3

• P increases 2%

Answer explanation

MV = PQ

5%(constant) = P(3%)

P = 5%/3% or 5/3