Quantity Theory of Money Equation of Exchange
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Questions and Answers

What determines the demand for money according to the text?

  • Level of transactions and institutions in the economy (correct)
  • Institutions in the economy only
  • Level of nominal income only
  • Quantum of taxes imposed

    • What leads to a proportional change in the price level?

  • Changes in interest rates
  • Changes in the quantity of money (correct)
  • Changes in aggregate output
  • Changes in velocity

    • What do classical economists, including Fisher, believe about wages and prices?

  • Dependent on government regulations
  • Constant and inflexible
  • Completely flexible (correct)
  • Irrelevant to economic theory

    • How does an increase in money supply affect the price level?

    <p>Increases it proportionally</p> Signup and view all the answers

    What remains fairly constant in the short run according to the Quantity Theory of Money discussed in the text?

    <p>Velocity</p> Signup and view all the answers

    Which factor predominantly affects changes in the price level according to Quantity Theory of Money?

    <p>Changes in money supply</p> Signup and view all the answers

    The equation of exchange states that the quantity of money multiplied by the what must be equal to nominal income?

    <p>Number of transactions</p> Signup and view all the answers

    If people begin to use credit cards more frequently for transactions instead of cash, what is the likely impact on velocity according to the text?

    <p>Velocity will increase</p> Signup and view all the answers

    What would happen to nominal income if money supply (M) increases but velocity (V) decreases?

    <p>Nominal income will remain unchanged</p> Signup and view all the answers

    How are institutions affecting transactions related to the determinants of velocity according to the text?

    <p>They influence how frequently money is used in transactions</p> Signup and view all the answers

    Which of the following best represents an example of the quantity theory of money, as explained in the text?

    <p>$$$M imes V = PXY$$$</p> Signup and view all the answers

    In the short run, how does the text suggest that changes in institutional and technological features of the economy impact velocity?

    <p>Velocity remains stable despite changes</p> Signup and view all the answers

    What does Fisher's view that velocity is fairly constant in the short run transform the equation of exchange into?

    <p>Quantity theory of money</p> Signup and view all the answers

    If the quantity of money M doubles according to the quantity theory of money, what happens to nominal income (P x Y)?

    <p>Doubles</p> Signup and view all the answers

    What does the quantity theory of money state is determined solely by movements in the quantity of money M?

    <p>Nominal income (spending)</p> Signup and view all the answers

    How is the demand for money interpreted in terms of Fisher's quantity theory?

    <p>$M = k imes PY / V$</p> Signup and view all the answers

    How are transactions generated in relation to the quantity of money demanded (Md)?

    <p>$Md = k imes PY$</p> Signup and view all the answers

    According to Fisher's view on the demand for money, what factor does not affect the demand for money?

    <p>Interest rates</p> Signup and view all the answers

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