1. What does the Quantity Theory of Money assume about the relationship of M and
ID: 1213198 • Letter: 1
Question
1.What does the Quantity Theory of Money assume about the relationship of M and Y?
The quantity theory assumes that changes in M will have a small impact on Y.
The quantity theory assumes that changes in M will have a large impact on Y. ( incorrect answer)
The quantity theory assumes that changes in M cannot change Y.
The quantity theory assumes that changes in M will have a indeterminate impact on Y.
2.The quantity equation:
Indicates that real GDP and velocity of money are positively related when all other things equal. ( incorrect answer)
Gives the relationship between the quantity of money and the velocity of money.
Is not very useful as monetary theory.
Indicates that the quantity of money must decrease when price increases.
3.According to the principle of monetary neutrality:
Real variables do not affect nominal variables. ( incorrect answer)
Changes in the money supply do not affect real variables.
Nominal variables are not adjusted for inflation and real units are adjusted for inflation.
Nominal variables are expressed in monetary units and real variables are expressed in physical units.
Explanation / Answer
Answer 1. The quantity theory assumes that changes in M cannot change Y. (According to QTM, M*V= P*Y, money supply is directly proportional to price level. The output (Y) is exogenously determined in the model. So, Money supply will have no impact on output(Y).
Answer 2. Indicates that the quantity of money must decrease when price increases. (It could be right, because Money supply and price level has a positive relation).
Answer 3. Nominal variables are not adjusted for inflation and real units are adjusted for inflation. (because nominal variables are expressed in absolute terms while real variables are adjusted for infation.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.