Question 1

According to the quantity theory of money, what happens to the price level ($$P) $$when the government increases the money supply ($$M) $$while real output ($$Y) $$and velocity ($$V) $$remain constant?

Accepted Answer

The price level increases proportionally to the increase in money supply.

Question 2

If the price of a basket of goods ($$P) $$rises from $$2 to$$ $$3$$, what happens to the value of money ($$1/P$$)?

Accepted Answer

The value of money decreases from $$1/2 to$$ $$1/3.$$

Question 3

Which equation represents the velocity of money ($$V) in $$the economy?

Accepted Answer

$$V = \frac{P 	imes Y}{M}$$

Question 4

Suppose the money supply ($$M) $$increases by 10% and velocity ($$V) is $$constant. If real output ($$Y) $$does not change, what is the expected percentage change in the price level ($$P$$)?

Accepted Answer

10%

Question 5

In the context of hyperinflation, what is the primary cause according to the quantity theory of money?

Accepted Answer

Excessive growth in the money supply.

Question 6

A sign in Zimbabwe prohibits the use of 'Zim dollars' as toilet paper. What economic phenomenon does this illustrate?

Accepted Answer

Hyperinflation causing currency to lose value.

Question 7

If nominal GDP is $$P 	imes Y = 30,000$$, money supply $$M = 10,000$$, what is the velocity of money ($$V$$)?

Accepted Answer

$$V = 3$$

Question 8

Which of the following best describes 'shoeleather costs'?

Accepted Answer

The resources wasted when inflation encourages people to reduce their money holdings.

Question 9

What is the 'inflation tax'?

Accepted Answer

The loss of value experienced by money holders when the government prints money and raises prices.

Question 10

According to the Fisher effect, if the inflation rate increases by 2%, what happens to the nominal interest rate?

Accepted Answer

It increases by 2%.

Question 11

If the real interest rate is 5% and the inflation rate is 3%, what is the nominal interest rate?

Accepted Answer

$$8\%$$

Question 12

Which of the following is NOT a cost of inflation?

Accepted Answer

Increase in real wages.

Question 13

If the money supply ($$M) $$increases by 5% and real output ($$Y) $$increases by 3%, with velocity ($$V) $$constant, what is the expected inflation rate?

Accepted Answer

2%

Question 14

Which scenario best illustrates arbitrary redistribution of wealth due to unexpected inflation?

Accepted Answer

Debtors benefit from higher-than-expected inflation.

Question 15

If the tax rate is 25%, nominal interest rate is 10%, and inflation is 0%, what is the after-tax real interest rate?

Accepted Answer

$$7.5\%$$

Question 16

Why does inflation cause tax distortions?

Accepted Answer

Because taxes are based on nominal income, which grows faster than real income during inflation.

Question 17

If the economy produces $$Y = 800$$ bushels of corn, money supply $$M = 2000$$, price per bushel $$P = 5$$, and velocity $$V is $$constant, what is nominal GDP?

Accepted Answer

$$4000$$

Question 18

What happens in the money supply-demand diagram when the Fed increases the money supply?

Accepted Answer

The value of money falls and the price level rises.

Question 19

Which of the following is true about real incomes in the long run according to the quantity theory?

Accepted Answer

Real incomes are determined by real variables, not the inflation rate.

Question 20

If the Fed increases the money supply but the economy's ability to supply goods does not change, what is the result?

Accepted Answer

Prices must rise.

Money and Inflation: The Quantity Theory and Its Implications

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