advertisement

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? 1 (6) Who is Ben Bernanke, and what influence does he have on the MV = PQ equation? 2