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AP Macroeconomics 5.3 Money Growth and Inflation Questions

Use the quantity equation to solve monetary relationships and distinguish short-run changes from the long-run effect of money growth on inflation.

Syllabus
Effective Fall 2022
Course
AP Macroeconomics

Exam points

  • solve MV=PY for money, velocity, the price level, or real output
  • infer proportional or growth-rate changes in nominal GDP and inflation from the quantity equation
  • distinguish short-run real-output effects from long-run money neutrality
  • explain sustained money expansion as a cause of inflation or hyperinflation
  • explain sustained money contraction as a cause of deflation when other terms are fixed

Covered syllabus points

POL-3.A—a. Explain (using graphs as appropriate) how inflation is a monetary phenomenon. b. Define the quantity theory of money. c.…

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.

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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 ]
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