Question

10. Which of the following statements is (are) correct? (x) The quantity equation is specified as MXV = PxY. Where P is the price level, M is the money supply V is the velocity of money. Y is real output and PX Y is nominal output. ly) The velocity of money is the calculated as the average number of times per year a dollar is spent (z) Based on the quantity equation, if P = 3.0. Y = 1,000 million, and M = 720 million, then V = 42 A. (x) (y) and (2) B. (x) and (y) only C. (x) and (z) only D y ) and (z) only E. (x) only 11. According to the assumptions of the quantity theory of money. If the money supply increases 5 percent, then A both the price level and real GDP would be unchanged. B. both the price level and real GDP would fall by 5 percent C both the price level and real GDP would rise by 5 percent D. the price level would be unchanged and real GOP would rise by 5 percent E the price level would rise by 5 percent and real GDP would be unchanged. 12. Which of the following is implied by the quantity equation? If velocity is stable and money is neutral, (x) a decrease in the money supply creates a proportional decrease in nominal output. (ya decrease in output creates an increase in the price level if the money supply is constant (z) a constant money supply provides price stability if real output remains constant A. X ly) and (2) B. (x) and (y) only C (x) and z) only D (yand only E z ) only

Answer 1

10.

(x) Quantity equation is MV = PY, where M = Money Supply, V = Velocity of money; P = Price Level and Y = Real output; P x Y = Nominal Output. Statement (x) is correct

(y)Velocity is defined as the average number of times a currency unit is exchanged in the economy i.e., the number of times a dollar is spent. Statement (y) is correct

(z)Given,

P = 3.0

Y = 1,008 million

M = 720 million

From quantity theory of money, we have MV = PY

=> V = PY/M = 3.0 x 1,008 million/720 million = 4.2

Statement (z) is correct

Ans: A. (x), (y) and (z)

11. The quantity theory of money assumes that V is constant and does not change with the changes in M or P

Therefore, when M increases by 5% and according to the principle of monetary neutrality(which states that changes in M does not affect Y), we obtain there is an increase in the price level by 5%

Ans: E. the price level would rise by 5% and real GDP would be unchanged

12. IF V is stable and Money is neutral, a change in M does not affect Y and directly reflects a proportional change in P

(x) MV = PY

Nominal Output = PY

If M decreases without a change in V, the PY decreases => Nominal output decreases proportionately

Statement (x) is correct

(y) Given, M and V are constant

=> PY = MV = constant

If Y decreases, P increases in order to maintain the constant value

Statement (y) is correct

(z) MV = PY where V is stable

If M and Y are constant, then P remains constant i.e., the price level remains stable

Ans: A. (x), (y) and (z)