AP Macro MV=PQ Quiz: Monetary Policy Implications Questions

📚 Quick Study Guide

• 🧮 The Quantity Theory of Money is expressed as $MV = PQ$, where:
• 💰 $M$ = Money Supply
• 🔄 $V$ = Velocity of Money (how many times money changes hands)
• 📊 $P$ = Price Level
• 🏭 $Q$ = Real Output (Quantity of goods and services)
• 🔑 Classical economists believe $V$ and $Q$ are relatively stable in the short run.
• 🎯 Changes in $M$ directly impact $P$ according to the Quantity Theory.
• 📈 An increase in the money supply ($M$) leads to inflation ($P$) if $V$ and $Q$ are constant.
• 📉 Contractionary monetary policy (decreasing $M$) aims to reduce inflation.
• 💸 Expansionary monetary policy (increasing $M$) can stimulate economic growth, but may lead to inflation if not managed carefully.

🤔 Practice Quiz

1. Which of the following is the correct representation of the Quantity Theory of Money equation?
   1. A. $M + V = P + Q$
   2. B. $M - V = P - Q$
   3. C. $M \times V = P \times Q$
   4. D. $M / V = P / Q$
2. Assuming velocity ($V$) and real output ($Q$) are constant, an increase in the money supply ($M$) will most likely lead to:
   1. A. Deflation
   2. B. Increased real output
   3. C. Inflation
   4. D. Decreased unemployment
3. If the money supply increases by 5%, velocity is constant, and real output increases by 2%, what is the approximate change in the price level?
   1. A. 2% decrease
   2. B. 3% increase
   3. C. 5% increase
   4. D. 7% increase
4. In the context of the Quantity Theory of Money, velocity of money refers to:
   1. A. The speed at which prices increase
   2. B. The rate at which money depreciates
   3. C. The number of times one dollar is used to purchase goods and services
   4. D. The total amount of money in circulation
5. Which of the following actions by a central bank would be considered contractionary monetary policy?
   1. A. Lowering the reserve requirement
   2. B. Buying government bonds
   3. C. Increasing the discount rate
   4. D. Printing more money
6. Suppose the money supply is $500 billion, velocity is 4, and real GDP is $1 trillion. According to the quantity theory of money, what is the price level?
   1. A. 0.5
   2. B. 2.0
   3. C. 4.0
   4. D. 8.0
7. If the central bank wants to keep inflation at 2% and real GDP is expected to grow at 3%, by how much should the money supply grow, assuming constant velocity?
   1. A. -1%
   2. B. 1%
   3. C. 5%
   4. D. 6%