Economics Wealth and Money Concepts Quiz

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Questions and Answers

Match the following forms of wealth with their characteristics:

Money = Includes currency and yields interest Bonds = Fixed payments in nominal units Equities = Fixed payments in real units Human capital = Productive capacity of human beings

Match the following variables in the demand function for money with their definitions:

M = Total stock of money demanded P = Price level y = Real income u = Variables other than income affecting money's utility

Match the following terms with their respective equations:

W = $Y/r$ gp = $(1/P)(dP/dt)$ MD = Demand for money curve MS = Money supply curve

Match the following elements of Friedman's theory of money with their implications:

Stable demand for money = Change in supply affects price level Increase in money supply = Shifts MS curve to the right Equilibrium income = Determined at E Inelastic money supply = Unchanged by changes in income Signup and view all the answers

Match the following types of returns with their respective financial instruments:

Expected nominal rate on money = Rm Expected rate on bonds = Rb Expected nominal rate on equities = Re Expected rate of change of physical assets = gp Signup and view all the answers

Match the following terms with their definitions:

Velocity of Money = Rate at which money circulates in the economy Volume of Trade = Total amount of transactions in a given time period Passive Factor = A variable that is affected by others but does not impact them Medium of Exchange = An intermediary instrument used to facilitate transactions Signup and view all the answers

Match the following concepts with their descriptions:

Total flow of expected income = Y Fraction of wealth in non-human form = w Claim to a time stream of payments = Bonds and Equities Inventories of durable goods = Physical goods Signup and view all the answers

Match the quantity of money (M) with its corresponding price level (P):

M = P M2 = P2 M4 = P4 M1 = 1/P Signup and view all the answers

Match the following income-related terms with their measurements:

Income (Y) = Measured on the vertical axis Demand for money = Measured on the horizontal axis Equilibrium point (E) = Intersection of MD and MS Increase in income = Moves MD curve Signup and view all the answers

Match the following functions with their variables:

M/P = Function of income and wealth R = Expected rate of return dP/dt = Rate of change of prices w = Wealth in non-human form fraction Signup and view all the answers

Match the curves with their relationships:

P=f(M) = Direct relationship between money supply and price level 1/P=f(M) = Inverse relationship between money supply and value of money P = Represents the price level 1/P = Represents the value of money Signup and view all the answers

Match the assumptions of Fisher's Quantity Theory with their statements:

Constant Velocity of Money = Not influenced by changes in quantity of money Constant Volume of Trade = Assumed to be unaffected by money changes Money as a Medium of Exchange = Facilitates transactions Long Period = Considered in the context of extended timeframes Signup and view all the answers

Match the components of the equation with their descriptions:

M = Quantity of money in circulation V = Velocity of money P = Price level in the economy T = Total volume of transactions Signup and view all the answers

Match the quantity of money with its value representation:

M1 = 1/P M2 = 1/P2 M4 = 1/P4 M = P Signup and view all the answers

Match the impacts of changes in money supply on price level:

Doubling M to M2 = Price level increases to P2 Increasing M to M4 = Price level raises to P4 M with the same amount = Price level remains unchanged Decreasing M = Price level may drop Signup and view all the answers

Match the types of money to their classifications:

Currency Money (M) = Physical money in circulation Bank Money (M’) = Deposits that can be used for transactions Fiat Money = Government-issued currency not backed by physical commodities Commodity Money = Money with intrinsic value Signup and view all the answers

Match the following equations with their corresponding economists:

M = PKT = Robertson N = PK + RK1 = Keynes P = K/T = Unknown D = f(M) = Unknown Signup and view all the answers

Match the terms with their definitions:

OM1 = Initial supply of money OP2 = Value of money after first increase in supply R = Cash reserve ratio of banks K1 = Amount held in bank deposits Signup and view all the answers

Match the supply changes to the corresponding value changes:

Supply increases from OM1 to OM2 = Value decreases from OP1 to OP2 Supply increases from OM1 to OM3 = Value decreases from OP1 to OP3 Supply remains constant = Value remains unchanged Supply decreases = Value increases Signup and view all the answers

Match the variables in Robertson’s Equation:

M = Total quantity of money T = Total volume of goods and services K = Fraction of T held as cash P = Price level Signup and view all the answers

Match the concepts with their corresponding economic intuition:

Directly proportional relationship = Increase in M leads to increase in P Inverse relationship = Increase in K leads to decrease in P Short-run assumption = K and K1 remain constant Long-run factors = K, K1, and R may vary Signup and view all the answers

Match the following variables with their roles in Keynes's Equation:

N = Quantity of money in circulation P = Price level of consumption goods K = Amount of consumption goods desired RK1 = Amount in bank deposits Signup and view all the answers

Match the supply curves with their corresponding labels:

Q1M1 = First supply curve Q2M2 = Second supply curve Q3M3 = Third supply curve D1 = Demand curve for money Signup and view all the answers

Match the criticism types with their focus:

Short-term assumptions = K and K1 considered constant Long-term variability = K, K1, and R may change Demand for money = Measured by consumption units Value of money = Changes inversely with money supply Signup and view all the answers

Match the criticisms of Friedman's theory with their descriptions:

Very Broad Definition of Money = Includes time deposits alongside currency and demand deposits Money not a Luxury Good = Time deposits do not exhibit luxury effects in other economies More Importance to Wealth Variables = Overemphasizes wealth over income in money demand Money Supply not Exogenous = Considers supply to be unstable and controlled by authorities Signup and view all the answers

Match the terms related to money supply and demand with their meanings:

M1 = Currency and demand deposits M2 = Includes time deposits Demand for Money = Assumed to depend on asset prices and income Suppliers of Money = Monetary authorities controlling money supply Signup and view all the answers

Match the critiques of Friedman's demand for money with their implications:

Ignores the Effect of Other Variables = Neglects prices and interest rates' influence on money supply Does not consider Time Factor = Fails to address the timing of adjustments to money theory No Positive Correlation between Money Supply and Money GNP = Correlation found between cash holdings and personal consumption Criticism of Wealth Variables = Income is the return on wealth, not a standalone factor Signup and view all the answers

Match the components of Friedman's theory with their elements:

Quantity Theory = Demand for money responding to changes in supply Economic Activity = Impact of money supply on overall expenditure Equilibrium E1 = New balance between money demand and money supply curves Wealth as a Variable = Prioritizes wealth variables over income in money demand Signup and view all the answers

Match the following key concepts with their definitions:

Index Numbers = Statistical devices to measure changes in money value Equilibrium = Balance between money supply and demand Economic Activity = Economic phenomena influenced by money supply changes Asset Prices = Price levels affecting the demand for money Signup and view all the answers

Match the components of Friedman's definitions of money with their specific types:

Currency = Physical cash in hand Demand Deposits = Funds held in checking accounts Time Deposits = Savings accounts that restrict access M1S1 = Money supply at the initial state of balance Signup and view all the answers

Match Friedman's assumptions about money supply with their significance:

Exogenous Supply = Assumes money supply is determined outside the economy Endogenous Supply = Believes supply is influenced by internal economic factors Stability of Demand = Demand for money is consistently predictable Pressure Points = Changes in money supply impact economic equilibrium points Signup and view all the answers

Match the economists or theorists with their stances on Friedman's theory:

Kaldor = Challenges the correlation between money supply and GNP Johnson = Critiques Friedman's reliance on wealth variables Friedman = Posits that supply affects economic activity Economists = Seek broader factors affecting money supply beyond Friedman's scope Signup and view all the answers

Match the types of inflation with their descriptions:

Comprehensive Inflation = Economy-wide inflation affecting all goods Sporadic Inflation = Increase in prices of only some specific goods Wartime Inflation = Inflation caused by excessive spending during war Peace Time Inflation = Inflation due to excess government expenditure in peacetime Signup and view all the answers

Match the types of deficit-induced inflation with their definitions:

Deficit induced inflation = Caused by deficit financing by the government Wage induced inflation = Caused by wage increases unmatched by productivity Profit induced inflation = Caused by excessively high profits for producers Post war inflation = Inflation occurring immediately after wartime Signup and view all the answers

Match the inflation types based on factors responsible for inflation:

Demand-pull Inflation = Arising from excess demand for goods Cost-push Inflation = Caused by increased production costs War-related Inflation = Increased prices due to military priorities Excessive Investment Inflation = Rise in income without a corresponding increase in goods Signup and view all the answers

Match the causes of inflation with their explanations:

Increase in money supply = Expansion of money supply beyond normal requirements Wars = Supply of goods for civilians reduced during wartime Excessive government spending = Investment that takes long to yield results Deficit financing = Government spending exceeding revenue leading to inflation Signup and view all the answers

Match the inflation types with their additional details:

Post-war inflation = Demand rises immediately after a war Peace Time Inflation = Results from government's excess spending Cost-push inflation = Caused by increased production costs due to wages Wage-induced inflation = Caused by wage rises without productivity increases Signup and view all the answers

Match the inflation causes to their specific implications:

Excessive investment = Leads to income rise without goods supply increase Deficit financing = Leads to inflation due to excessive government debt Increased money supply = Leads to rise in prices as demand outstrips supply Wars = Divert resources from civilian to military needs Signup and view all the answers

Match the inflation classifications with their criteria:

Sporadic Inflation = Specific goods experiencing price increases Comprehensive Inflation = All goods across the economy affected Wartime Inflation = Expenditures related to military conflicts Peace Time Inflation = Regular economic activity with excess expenditure Signup and view all the answers

Match the causes of inflation with relevant examples:

Increase in money supply = When money availability exceeds usual trade needs Wars = Military expansion reduces civilian product availability Excessive investment = Long-term projects resulting in short-term price rises Deficit financing = Government spends more than it earns consistently Signup and view all the answers

Match the groups affected by inflation with their corresponding impacts:

Debtors = Gain from repaying borrowed money at lower purchasing power Wage Earners = Suffer as wages do not rise with cost of living Fixed Income Groups = Hit hard as incomes remain unchanged during rising prices Investors in Debentures = Lose as fixed income securities do not keep up with inflation Signup and view all the answers

Match the groups of individuals to their situation during inflation:

Farmers = Benefit due to rising prices of agricultural products Entrepreneurs = Enjoy higher profits in short run Creditors = Lose purchasing power on repaid debts Investors in Equity = Gain from a share in profits amidst inflation Signup and view all the answers

Match the type of individuals to their vulnerability during inflation:

Pensioners = Severely affected as they live on fixed incomes Salaried Class = Struggle as their earnings do not keep pace with inflation Merchants = Benefit from price increases Workers = May resort to strikes due to economic stress Signup and view all the answers

Match the inflationary outcomes with their consequences:

Persistent Inflation = Adverse impact on middle and low-income groups Hyperinflation = Retribution of income favoring the wealthy Speculative Activities = Encouraged by falling production International Trade = Imbalance due to decreased exports Signup and view all the answers

Match the inflation effects with their classifications:

Debtors vs Creditors = Debtors gain, creditors lose Wage Earners vs Investors = Wage earners suffer while investors gain Middle Class Impact = Struggling with increasing cost of living Traders = Experience all-round gains due to price rises Signup and view all the answers

Match the inflationary impact on financial security to the affected group:

Fixed Income Earners = Income remains stagnant as prices rise Farmers = Experience favorable conditions during inflation Equity Investors = Benefit from increasing profits during inflation Workers = Face strikes due to economic pressures Signup and view all the answers

Match the inflation effects with their descriptions:

Effects on Distribution = Income re-distribution favoring the wealthy Investor Behavior = Shift towards profits from equity Cost of Living Increase = Pressure on wage adjustments Political Instability = Arises from social unrest due to inflation Signup and view all the answers

Study Notes

Value of Money

Value of money refers to the purchasing power of money.
It's the quantity of goods and services that can be bought with a unit of money.
D. H. Robertson defined the value of money as the amount of things exchanged for a unit of money.
The value of money is a relative concept, depending on the price level of goods and services.
Money buys more when prices are low and less when prices are high.
The value of money is inversely related to the price level.

Standards of Value of Money

Wholesale Standard: Value of money is expressed in terms of prices of commodities traded in wholesale markets (raw materials, semi-finished, finished goods).
Retail Standard: Value of money is expressed in terms of goods and services purchased by average families for consumption.
Labour Standard: Value of money is measured by the average wage rate for a day's work

Types of Value of Money

Internal Value: The purchasing power of money within a country. Measured by domestic goods and services; based on the internal price level.
External Value: The purchasing power of money over foreign goods and services. Measured by the exchange rate between two currencies.

The Quantity Theory of Money

This theory explains the determination of the value of money and its variations over time.
Writers like Locke, Hume, Irving Fisher, Alfred Marshall, A.C. Pigou, and Friedman contributed to this theory.
The general price level varies directly and proportionately with the quantity of money, all else being equal.
The value of money fluctuates; when prices rise, the value of money declines and vice-versa.
Two approaches exist: the American (cash transaction) and Cambridge (cash balance) versions.

Fisher's Quantity Theory of Money (Cash Transaction Approach)

The American economist Irving Fisher explained this approach in his 1911 book, "The Purchasing Power of Money."
In this approach, other things remain the same, the price level changes proportionally to the change in money supply.
The theory is explained using the equation of exchange: MV = PT
- M = total quantity of money of all types.
- V = velocity of circulation of money.
- P = Price per unit
- T = Total amount of goods and services exchanged for money.

Supply of Money

The supply consists of the quantity of money (M) multiplied by its velocity (V).
MV represents the total volume of money in circulation during a period.

Demand for Money

The demand for money is the total market value of all goods and services transacted during that period.
Obtained by multiplying the total amount of things (T) by the average price level (P).
MV=PT shows the total value of all goods sold in an economy and the total supply of money is equal to the total demand for money for transaction.

Modern Economy Equation of Exchange

In the modern economy, the total volume of money is equal to the total money supply of currency (M) + credit money (M1), multiplied by the velocity of circulation of each.

Criticisms of Quantity Theory of Money

Unrealistic assumption of constant V and T
Unrealistic assumption of full employment
The quantity theory does not explain trade cycles.
The equation of exchange is a simple truism, not a causal relationship.
The theory is static in nature.
It assumes a fixed relationship between money supply and price level, which is not always true in real-world conditions.

The Cash-balance Approach (Cambridge Equation of Exchange)

Provided by economists such as Marshall, Pigou, Robertson, and Keynes.
The value of money is determined by the supply and demand for money.
The supply of money is a stock, not a flow, consisting of all cash and deposits.
Demand for money represents the demand for cash balances.
The amount of cash balances held is proportional to real income.
Marshall’s Equation: M = KPY
- M = Total money supply
- K = Proportion of income held in cash
- P = Price level
- Y = Real income
Pigou's Equation: P = KR/M
- P = Purchasing power of money
- K = Proportion of income held in cash
- R = Real income
- M = Total money supply

Index Numbers

Index numbers are statistical devices measuring changes in the value of money over time.
They represent average changes in one or more related variables between two periods (or geographic locations).
- Price Index Numbers: Compare prices for a group of commodities across time periods for a specific geographic area.
  - Wholesale Price Index: Prices of goods traded in wholesale markets.
  - Retail Price Index: Prices of final consumer goods in retail markets.
  - Cost of Living Index: Measures changes in the cost of living for various groups.
- Quantity Index Numbers: Measure changes in the volume of goods produced or consumed.
  - Agricultural Index: Tracks changes in agricultural production.
  - Industrial Index: Tracks changes in industrial production.
  - International Index: Tracks price differences across countries.
  - Trade Index: Measures trade activity changes between countries
- Value Index Numbers: Compare total values of a period vs base period. Quantities and prices are considered.
- Investment Index Numbers: Track investment trends and security prices.

Steps for Index Number Construction

Clearly define the purpose of the index.
Choose a base period - Preferably a normal year - avoiding drastic changes due to external factors.
Select commodities that are representative and relevant, with well-defined quantities and weights.
Collect accurate data; prices can be gathered from primary/secondary sources (wholesale/retail markets).

Inflation

Inflation refers to a situation of continuous rise in the general price level over time.
Reduced purchasing power of money over a period.
Too much money pursuing limited goods.

Features of Inflation

Constant rise in prices.
Primarily determined by money supply.
Demand exceeding supply.
Occurs after full employment.

Classification of Inflation

Based on the increase rate:
- Creeping Inflation (Mild)
- Walking Inflation (Moderate)
- Running Inflation (Fast)
- Galloping Inflation (Rapid)
Based on Government Reaction:
- Open Inflation
- Suppressed
- Repressed Inflation
Based on employment
- Partial Inflation
- True Inflation
Based on number of goods covered
- Comprehensive Inflation
- Sporadic Inflation
Based on time
- Wartime Inflation
- Post War Inflation
- Peacetime Inflation

Causes of Inflation

Increase in money supply, excessive investments by the government, wars, deficit financing, taxes, devaluation of currencies, rising wages, bottlenecks in production, natural disasters.

Effects of Inflation

Adverse effects on production and saving.
Reduction in production (uncertainty of future prices).
Hoarding and Black marketing (lack of supply). -Encourages speculative activities.
Adverse effects on distribution (rich get richer while poor get poorer.) -Debtors win and creditors lose with rising prices.
Wage earners lose due to slower rise in wages with compared to the inflation rate.

Measures to Control Inflation

Monetary Measures:
- Bank rate policy
- Open market operations
- Cash reserve ratio
- Statutory liquidity ratio
Fiscal Measures:
- Increase in taxation
- Reduce public expenditure
- More government borrowing
- Preparing surplus budget
Other Measures:
- Saving schemes
- Selection of proper projects.
- Increased imports.

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Test your understanding of key economic concepts related to wealth, demand for money, and financial instruments. This quiz includes matching terms with definitions, equations, and implications from various economic theories. Challenge your knowledge and see how well you know the intricacies of money and wealth in economics.