1. The quantity theory of money, can be used to show what relationship between P

Question

1. The quantity theory of money, can be used to show what relationship between P, M and Y?

a. Inverse relationship between P and M, given Y

b. Inverse relationship between P and Y, given M

c. Positive or direct relationship between P and Y, given M

d. None of the above

2. Sticky prices give us what type of supply curve?

a. Long run horizontal supply curve

b. Long run vertical supply curve

c. Short run horizontal supply curve

d. Short run vertical supply curve

3. The long run aggregate supply curve (LRAS) implies that unemployment is

a. At the natural rate

b. The sum of structural and frictional unemployment

c. Both (a) and (b)

d. None of the above

Explanation / Answer

a) "D"

As per the quantity theory of money, there is a direct relationship between the M and P, given Y. If the money supply is high the price will be higher. taking the Y as constant.

b) "C"

Sticky wage means the price or the wage doesn't change in the short run. it gives up a horizontal supply curve in the short run. Just opposite will be wages that are very flexible, it will give us a vertical supply curve.

c) The natural rate of unemployment is a sum of frictional and structural unemployment. both the statement is true. The answer is "C".

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