We have the following information about a country for a particular year (in appr

Question

We have the following information about a country for a particular year (in appropriate units): GDP Deflator (P) = 200 Real GDP (Y) = 150,000 Money Supply (M) = 7,500,000 The velocity of circulation of money (V) in this country equal 6. True False

In the classical model the velocity of circulation is V = 2, the general price level is P = 240, and the real GDP equals Y = 300,000. In this model the demand for money equals M = 36,000,000. True False

In the classical model the velocity of circulation is V = 2, the general price level is P = 240, and the real GDP equals Y = 300,000. In this model the demand for money equals M = 36,000,000. True False

According to the classical economists the velocity of circulation of money is constant in the long run but quite variable in the short run. True False

According to Keynes, if the interest rate increases, demand for bonds will increase but the demand for money will decrease.

True/ False

When interest rates increase, bond prices go down.

True False

If the velocity of circulation of money is constant, a 10 percent increase in money supply will leave the nominal GDP unchanged.

TrueFalse

Explanation / Answer

(1) False

As per quantity theory of money,

M x V = P x Y

V = P x Y / M = 200 x 150,000 / 7,500,000 = 4

(2) True

Similarly,

M = P x Y / V = 240 x 300,000 / 2 = 36,000,000

(3) False

V is fixed in short run but variable in long run, it's assumed.

(4) True

(5) True

Interest rate & bond price are inversely related.

(6) False

We know: M x V = P x Y

P x Y = Nominal GDP

As M increases with V constant, P x Y increases by the same %.

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