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Relationship Between Quantity of Money and Price Level

12 Questions

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Relationship Between Quantity of Money and Price Level

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Questions and Answers

What happens to the price level (P) when the quantity of money (M) is doubled?

P decreases by 25%

P is doubled (correct)

P is halved

P remains constant

How does an increase in the desire to hold money (K) affect the price level according to the text?

Price level fluctuates

Price level decreases (correct)

Price level increases

Price level remains constant

In the context of the text, what does a higher value of K signify for the price-level and value of money?

Higher value of K has no impact on price-level or value of money

Higher value of K leads to higher price-level and value of money

Higher value of K leads to lower price-level and lower value of money (correct)

Higher value of K leads to lower price-level and higher value of money

Which relationship best describes the connection between the quantity of money (M) and the price level (P) according to the text?

Direct relationship Signup and view all the answers

What is the impact on price-level when demand for money increases according to the text?

Price level decreases Signup and view all the answers

How does a reduction in present expenditure due to an increase in the desire to hold money affect the price level?

Price level decreases Signup and view all the answers

What is one of the main criticisms of the cash balance approach mentioned in the text?

It does not consider the impact of real forces on price-level changes. Signup and view all the answers

What is a key difference between central banks and commercial banks?

Central banks do not seek profit, while commercial banks aim to make a profit. Signup and view all the answers

What is a responsibility typically associated with central banks, as mentioned in the text?

Regulating and supervising the activities of commercial banks. Signup and view all the answers

Why is the assumption of 'ceteris paribus' considered unrealistic in relation to the cash balance approach?

It assumes all other variables remain constant, which is not practical in reality. Signup and view all the answers

What aspect does the cash balance approach neglect, according to the text?

The role of rate of interest and non-monetary factors. Signup and view all the answers

What does a central bank typically NOT do with regards to deposits from the public?

Pay interest on them. Signup and view all the answers