MV=PQ questions

1. MV=PQ questions • What is M , V, P, Q and what does it show? • What will happen to the Price level from the quantity theory of money if M increases and all other factors remain the same. • What will happen to the Price level if velocity increases? • What would cause velocity to increase? • What would cause Real Output/ GDP to increase?

2. Compare and contrast questions Your answers to include reference to the following key ideas:

3. MV=PQ answers MV = PQ where M = money supply, V = velocity P= Price(general price level) Q= output/Real GDP • M α P Any change in money supply will result in a proportionate change to the price level. • Assuming V and Q are constant. • If other factors are going to change others will likely not change. • Underutilised resources i.e. recession or Full capacity

4. M – Money supply V- Velocity • Interest rates are lowered or increased by banks • The Reserves required through banking requirements i.e. banks hold some deposits for daily withdrawals (by law) and relend the rest to households and businesses for loans. • Availability of credit from overseas sources • So M can change which leads to a proportional change in PQ. • Inflationary expectations (what people expect of prices) • Availability of credit so people can finance spending leading to a change in rate. • Consumer confidence depending on level of confidence by households. • So V can change which leads to a proportional change in PQ.

5. P – General Price Level Q- real GDP/ output • Demand-pull inflation increase in AD = C + I + G + (x-m) • Cost push inflation decrease in AS as a result of increased raw materials, productivity decreasing and wages increasing. • If P increases then MV will increase in equal proportion assuming Q is constant. • Velocity may increase with increased consumption but usually it is constant so M should increase proportionally. • In a recessionary period where idle resources are available so production can increase. • Not during a boom as resources are allocated to production so output changes are minimal. • Q will be constant unless in the right conditions e.g. recession or depression or weak recovery. • If any of these factors change the other side of the equation will change as a result in equal proportion.

6. MV=PQ – causes why and how

7. Answers • Include a definition of Quantity theory of money – a theory that shows the relationship between economic variables and how they can influence economic activity in the economy based on MV=PQ. • MV=PQ shows one side moves in proportion to the other so if one factor changes both sides will change. • Describe factor and situation then why it changes / how and impact on the equation - both sides of it. • If comparing two situations look for the same impact and a different impact. Then greatest impact justified why will it have biggest impact.

8. Questions page 36/ 37 workbook • Use the Quantity theory of money to explain in detail the effect on the price level of an increase in the money supply in a recessionary period. • Use the Quantity theory of money to explain in detail the effect on the price level of a decrease in the money supply in a boom period. • Compare and contrast the effect on the price level of: • An increase in the money supply of 5% • An increase in the money supply, which is accompanied by an increase in savings due to KiwiSaver