Question 1

According to the quantity theory of money, if the velocity of money ($$V) is $$stable and real output ($$Y) is $$determined by technology and factor supplies, what is the long-run effect of doubling the money supply ($$M) on $$the price level ($$P$$)?

Accepted Answer

The price level ($$P) $$will double.

Question 2

Suppose in a given year, the quantity of money ($$M) is$$ $$200$$, the price level ($$P) is$$ $$5$$, and real GDP ($$Y) is$$ $$800. $$What is the velocity of money ($$V$$)? Use the quantity equation $$M 	imes V = P 	imes Y.$$

Accepted Answer

$$V = 20$$

Question 3

Which of the following best describes the 'inflation tax'?

Accepted Answer

It is the revenue a government raises by creating money.

Question 4

During a period of hyperinflation, which of the following is most likely to occur?

Accepted Answer

People may revert to barter or use a stable foreign currency for transactions.

Question 5

If nominal GDP ($$P 	imes Y) is$$ $$1,000$$, the money supply ($$M) is$$ $$250$$, what is the velocity of money ($$V$$)?

Accepted Answer

$$V = 4$$

Question 6

According to the classical theory of inflation, what is the primary cause of sustained high inflation?

Accepted Answer

Rapid growth in the money supply.

Question 7

Suppose the Bank of Canada increases the money supply by 10% per year, and real GDP grows at 3% per year. According to the quantity theory of money, what is the expected inflation rate?

Accepted Answer

7%

Question 8

Which of the following statements is consistent with the quantity theory of money?

Accepted Answer

In the long run, an increase in the money supply leads to a proportional increase in the price level.

Question 9

In the quantity equation $$M 	imes V = P 	imes Y$$, which variable is assumed to be most stable over long periods according to the classical theory?

Accepted Answer

Velocity ($$V)$$

Question 10

If the central bank prints large amounts of money to finance government spending, what is the most likely consequence according to the classical theory of inflation?

Accepted Answer

A rapid increase in the price level (inflation).

Question 11

Suppose in a simple economy, the money supply ($$M) is$$ $$100$$, the price of a pizza ($$P) is$$ $$10$$, and 200 pizzas ($$Y) $$are produced in a year. What is the velocity of money ($$V$$)?

Accepted Answer

$$V = 20$$

Question 12

Which of the following best explains why hyperinflation undermines the usefulness of money?

Accepted Answer

Money rapidly loses its value, so it no longer serves as a reliable store of value or medium of exchange.

Question 13

If the price level ($$P) is$$ $$4$$, real GDP ($$Y) is$$ $$500$$, and the velocity of money ($$V) is$$ $$2$$, what is the money supply ($$M$$)? Use $$M 	imes V = P 	imes Y.$$

Accepted Answer

$$M = 250$$

Question 14

Which historical event is cited as a classic example of hyperinflation caused by excessive money printing?

Accepted Answer

Post-World War I Germany (Weimar Republic)

Question 15

If the government cannot raise enough revenue through taxes or borrowing, what alternative does it have, and what is the likely macroeconomic consequence?

Accepted Answer

It can print money, which is likely to cause inflation.

Question 16

Suppose the price level in an economy rises from $$1 to$$ $$2$$ while the money supply and real output remain constant. What must have happened to the velocity of money?

Accepted Answer

Velocity must have doubled.

Question 17

Which of the following is NOT a function of money that is undermined during hyperinflation?

Accepted Answer

Money as a means of production.

Question 18

If the central bank wants to keep inflation at zero and real GDP is growing at 2% per year, what should be the growth rate of the money supply according to the quantity theory of money (assuming velocity is constant)?

Accepted Answer

2% per year

Question 19

Which of the following best describes the adjustment process after a monetary injection, according to the classical theory?

Accepted Answer

The injection of money increases demand for goods and services, raising prices.

Question 20

In the context of the quantity theory of money, which of the following is assumed to be determined primarily by factor supplies and technology, and not by the money supply?

Accepted Answer

Real output ($$Y)$$

Money Growth and Inflation: The Classical Theory of Inflation

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