1. Recall the classical economists and one of their
favorite theories: the quantity theory of money and monetary
neutrality. The theory is expressed as an equation as follows: M x
V = P x Y. What does V stand for?
a. the value of the domestic currency
b. the velocity of money
c. the virtual reality of the universe
d. the velocity of investment spending in the economy
2. Following up on question 1 above, what does Y represent?
a. output or Real GDP
b. nominal GDP
c. the rate of unemployment
d. net exports
3. Referring to the same equation, what does the term (P x Y) represent?
a. real GDP
b. the price of goods and services in the economy
c. nominal GDP
d. none of the above
4. Suppose that the central bank increases the money supply by purchasing government debt (securities) in an open market operation. What outcome does the theory of monetary neutrality and the quantity theory of money suggest?
a. When M rises, both P and Y rise
b. When M rises, V falls
c. When M rises, nothing else will change
d. When M rises, only P, the price level, will rise
5. Following up on your answer to question 4, therefore, real output will ______________________.
a. Not change
d. None of the above
6. True or false. The quantity theory of money and monetary neutrality are consistent with the long run aggregate demand and supply model (with a vertical aggregate supply curve).
1) V stand for velocity of money
2) Y stand of real gdp
3) P*y stand for nominal gdp
4)when M rises, only p rises
5)real output will not change
6)true, In long run Y, real output remain constant at potential level, irrespective of money supply,M, level. Higher will be Money supply,higher will be price but Y , real output, will remain constant.only prices level change. So Monetry neutrality refers to change in money supply does affect real variable or real output.
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