Practice Questions for video: (MO.2.a) Introducing the MV = PQ equation (Quantity Theory
of Money) [video] (pic used in video), in the textbook section (MO) Money
Introducing the MV = PQ Equation
basket: a collection of goods and services the average citizen consumes.
M = money supply
V = money velocity
P = amount of money needed to buy a basket
Q = number of baskets consumed
(1) Suppose that the economy is able to consume Q = 8,000,000 baskets. It uses commodity money
in the form of pieces of paper that correspond to one pound of gold. In total, there are M = 50,000
lbs of gold in the economy. On average, people spend each pound of gold 10 times each year (V =
10). How many lbs of gold is needed to buy one basket? That is, what is P?
(2) Regarding question 1, suppose a new gold discovery doubles the amount of gold available to be
used as money. This does not change the economy’s ability to produce goods and services, so Q is
unchanged. V doesn’t change either. What is the new price level, P?
(3) Regarding question 1, suppose a new trading platform is developed where citizens can swap used
goods. How will this affect M, V, P, and Q?
(4) Regarding question 1, suppose citizens develop a lack of confidence in their economy. The
amount of gold doesn’t change but citizens want to keep some gold hidden under their mattress in
fear of bad times ahead. Consequently, V falls from 10 to 8. How might this affect the economy?
(5) Regarding question 4, suppose you are a Keynesian (meaning you follow the teaching of British
economist John Maynard Keynes, and are probably a Democrat) and you believe that when V falls
from 10 to 8, prices are sticky and will not change. How might this loss of confidence affect the
economy?
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(6) Who is Ben Bernanke, and what influence does he have on the MV = PQ equation?
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