Economics Quiz on Inflation and Money Supply

A general increase in the price level is called:

• hyperinflation

• deflation

• inflation

• devaluation

In the quantity equation MV = PT, V is the:

• income velocity of money

• transactions velocity of money

• inflation rate

• value of the money supply

In the quantity equation, the total output of the economy Y is used instead of transactions T because:

• income is harder to measure than transactions

• transactions are harder to measure than income

• transactions grow at a faster rate than income

• transactions grow at a slower rate than income

In the quantity equation, V represents the:

• total number of transactions during some period of time

• price of a typical transaction

• rate at which each unit of money circulates in the economy

• quantity of money

According to the quantity equation, if M increases by 3 percent and V increases by 2 percent, then:

• real income increases by approximately 5 percent

• the price level increases by approximately 5 percent

• the nominal interest rate increases by approximately 5 percent

• nominal income increases by approximately 5 percent

Using the quantity equation MV = PY, which of the following might happen if the money supply increases?

• Velocity is constant, prices rise, and total output is constant

• Velocity increases, prices are constant, and total output is constant

• Velocity is constant, prices fall, and total output is constant

• Velocity rises, prices fall, and total output is constant

Consider an economy where the money supply is growing at 7 percent per year and velocity is constant. Which of the following statements about real GDP growth and the inflation rate could be TRUE if the Quantity Theory of Money holds?

• Real GDP is growing at 2 percent and inflation is 5 percent

• Real GDP is growing at 7 percent and inflation is 7 percent

• Real GDP is growing at 2 percent and inflation is 9 percent

• Real GDP is growing at 9 percent and inflation is 2 percent

Consider an economy where the only goods traded are coconuts and pineapples. Last year, 100 coconuts were sold at $1 apiece, and 200 pineapples were sold at $2.50 apiece. If the money supply was $100, what was velocity?

• 30

• 15

• 6

• 5

Which component of the quantity equation is assumed constant by the quantity theory of money?

• the money supply

• the velocity of money

• the level of income

• the price level

The quantity theory of money states that if the money supply doubles and output is constant, prices will:

• fall by half

• remain the same

• double

• fall only if velocity rises