Question

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

b. Increase

c. Decrease

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).

a. True

b. False

Answer #2

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.

answered by: anonymous

The quantity theory of money we discussed in class assumes that
the ratio of money to GDP is constant. This can be equivalently
expressed by the Fisher equation:
M ×V = P × Q
Where:
• M represents the money supply.
• V represents the velocity of money. which is the
frequency at which the average same unit of currency is used to
purchase newly domestically-produced goods and services within a
given time period. In other words, it is the...

Answer the following questions on the quantity theory of
money.
a) According to the quantity theory of money, what will happen
to nominal GDP if the money supply increases by 5% and the velocity
of money does not change?
b) What will happen to nominal GDP if, instead, the money supply
decreases by 8% and the velocity does not change?
c) What will happen to nominal GDP if, instead, the money supply
increases by 5% and the velocity decreases by...

What is the neutrality of money with respect to the quantity
theory of money?
A.
The money supply can affect the growth rate of prices
(inflation) in the long run.
B.
The money supply cannot affect the growth rate of real GDP in
the long run.
C.
The money supply can affect the growth rate of the real GDP in
the short run.
D.
All of the above.

Which of the following is not the quantity equation of
money?
Select one:
a. Money Supply x Velocity = Price Level x Real GDP
b. Velocity = Nominal GDP / Money Supply
c. Nominal GDP = Money Supply x Velocity
d. Real GDP = Money Supply x Velocity

1. Use the quantity theory of money equation to address the
following questions. Use the following as initial values: M = $4
trillion, V = 3, P = 1, Y = $12 trillion. (2 points) MV = PY a. All
other things being equal, by how much will nominal GDP expand if
the central bank increases the money supply to $4.2 trillion and
velocity remains constant? Show your work and explain your answer.
b. Reset your values to the initial...

What is the key endogenous variable in the quantity theory?
Explain the effect on this key variable of the following
changes:
A. The money supply is doubled
B. The velocity of money increases by 10%
C. Real GDP rises by 2%
D. The money supply increases by 3% while real GDP rises by 3%
at the same time

3. Use the classical model of a closed economy and the quantity
theory of money to predict how each of the following shocks would
affect real aggregate income (Y), the real interest rate (r), and
the price of goods and services (P) in a closed economy in the long
run, all else equal. For each shock, be sure to clearly state a
prediction for all three variables (up, down, or no change) and
illustrate your predictions with supply/demand diagrams for...

2. Suppose that in the U.S., the income velocity of money (V) is
constant. Suppose, too, that every year, real GDP grows by 2.5
percent (%∆Y/year = 0.025) and the supply of money grows by 10
percent (%∆M/year = 0.10).
a. According to the Quantity Theory of Money, what would be the
growth rate of nominal GDP = P×Y? Hint: %∆(X×Y) = %∆X + %∆Y.
b. In that case, what would be the inflation rate (i.e.
%∆P/year)?
c. If the...

Suppose that this year's money supply is $500 billion, nominal
GDP is $10 trillion, and real GDP is $5 trillion.
The price level is _____, and the velocity of money is
_____.
Suppose that velocity is constant and the economy's output of
goods and services rises by 3 percent each year. Use this
information to answer the questions that follow.
If the Fed keeps the money supply constant, the price level will
(stay the same, rise by 3%, or fall...

Suppose that this year's money supply is $500 billion, nominal
GDP is $10 trillion, and real GDP is $5 trillion.
The price level is ______, and the velocity of money is
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.
Suppose that velocity is constant and the economy's output of
goods and services rises by 4 percent each year. Use this
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If the Fed keeps the money supply constant, the price level will
_______ (rise by 4%, stay the same,...

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