Transcript MV=PQ questions - CHS Commerce Department

MV=PQ questions
1. What is M , V, P, Q and what does it show?
2. What will happen to the Price level from the
quantity theory of money if M increases and all
other factors remain the same.
3. What will happen to the Price level if velocity
increases?
4. What would cause velocity to increase?
5. What would cause Real Output/ GDP to
increase?
Compare and contrast questions
Your answers to include reference to the following key ideas:
C Concepts must be defined and terms used correctly with depth in
answers including the Why, What and How of the situation.
M Models must be linked into your answers e.g. PPC, AD/AS, Foreign
S
exchange, 2 country model, world market /Demand supply market
Situation given – every example given must be referred to
including product, country, shifts required, why and how detail.
C Compare the two situations given for the impacts /flow on effects
C
to society. What is the same for both situations.
Contrast the two situations given for the impacts/ flow on effects
to society and identify the situation that will have the greater
effect on the economy. What is different for both situations.
Justify your answers for Excellence.
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
M – Money supply
– 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.
V- Velocity
– 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.
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.
Situation
Factor
Why how
Effect on MV
Effect on PQ
MV=PQ
–
causes
why
and
how
Household borrowing rises
Availability of credit drops
Bank reserves increase
Demand pull inflation rises
More idle resources used
in production
Interest rates increase
Full capacity – boom
period continues
Cost-push inflation rises
Interest rates decrease
Consumer confidence
increases
Inflationary expectations
rise
Consumer confidence
decreases
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.
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