AP Macroeconomics 5.3: Money Growth and Inflation
Use the quantity theory of money to connect money supply, velocity, price level, and real output, and explain long-run inflation.
- Syllabus
- Effective Fall 2025
- Course
- AP Macroeconomics
Covered syllabus points
5.3 Money Growth and Inflation question 1
[Maximum number: 2]
Assume that commercial banks must hold a minimum of 20% of their deposits as reserves. Now suppose that the central bank of the country sells $100,000 of government bonds to commercial banks.
Question (a)
(a)
Given the change in the money supply in part (a), if the velocity of money is constant, what will happen to the nominal gross domestic product? Explain.
[ 1 ]
State that nominal gross domestic product will decrease and explain that according to the
quantity theory of money (MV=PY), a decrease in the money supply will decrease nominal
gross domestic product for a given velocity.
1 point
Question (b)
(b)
Based on the change in the nominal gross domestic product in part (c), what happens to the price level if the real gross domestic product is constant?
Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.
[ 1 ]
State that the price level decreases.
1 point
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