5.3: Money Growth & Inflation Flashcards
Velocity of Money
the average time a dollar is spent and respent in a year
real GDP/ money in the economy
Quantity Theory of Money
M x V= P x Y
M=money supply
V= velocity
P= price level
Y= quantity of output
What does P x Y equal?
Nominal GDP
If the central bank increases the money supply and output stays the same, what will happen to the price level?
It will increase
An increase in the money supply will always eventually lead to what?
Inflation
Short-run spending will eventually lead to…
higher resource prices and inflation
What happens when the inflation gets bad enough?
Banks don’t lend and the economy, and the economy tanks
Why do economists support expansionary policy?
monetary policy can increase real output in short run
Given a constant velocity of money, in the short run a 5 percent increase in the money supply will translate to a 5 percent increase in the
A gov. budget deficit
B real gross domestic product
C nominal gross domestic product
D real interest rate
E nominal interest rate
c
Hyperinflation is typically caused by
A. high tax rates that discourage work effort
B. continuous expansion of the money supply to finance gov. budget deficit
C. trade surpluses that are caused by strong protectionist policies.
D. bad harvests that lead to widespread shortages
E. a large decline in corporate profits that lead to decrease in production
b
T or F: The quantity theory of money shows that an increase in the velocity of money will increase the money supply.
F
T or F: The velocity of money is the average times a dollar is spent and re-spent in a year.
T
T or F: If the money supply stays the same but the velocity of money increases, the nominal GDP will stay the same.
F
T or F: In the long run, the quantity of money has no affect on the real GDP
T
T or F: An increase in the money supply will increase either the price level or the real GDP
T
