1 Introducing the MV = PQ Equation basket: a collection of goods

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