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Ch. 20 -Practice 1. If M = the cash supply Y = veritable output, P = the outlay level, and V = focal ratio, which of the sideline extend tos the speeding of bills? A. (Y x M)/P B. (P x M)/Y C. (P x Y)/M D. (P x Y) +M 2. If the equality of exchange is MV = PY the Y represents A. Nominal GDP B. solid GDP C. Potential output D. Economic growth 3. According to the equation of exchange, if true(a) output and the money supply stay the same and the price level increases A. The speed of money has to increase B. The swiftness of money has to falloff C. The real GDP had to rise D.Nominal GDP remains constant 4. Which of the following expresses the equation of exchange? A. MY = PV B. MV = Y C. MV = PY D. MP = VY 5. utilize the equation of exchange, if inflation is 1. 5%, real output grows by 3. 0%, and the growth rate of money is 5. 0%, the change in the velocity of money is A. Zero velocity is constant B. -0. 5% C. +4. 5% D. +0. 5% 6. Using the equation of exchange, if real GDP increases by 3. 0%, the velocity of money grows by 1. 0% and the growth rate of money is 3. 0% what is the rate of inflation? A. +1. 0% B. It is constant or a 0% change C.It is the same as the growth rate of money, or 3. 0% D. -1. 0% 7. Using the equation of exchange, if inflation is 1%, the velocity of money grows by 1. 0% and the growth rate of money is 3. 0% what is real growth? A. +3. 0% B. 1% C. 4. 0% D. -1. 0% 8. If velocity of money is constant real growth in the output of the economy is +2. 5% and inflation is 2. 0% what is the growth rate of money? Here we quarter employ the percentage change form of the equation of exchange where %M + %V = %P + %Y. Inserting the known values and solving for the %M we gain %M + 0 = 2. 0 + 2. or %M = 4. 5. 9. The consumer price index is a commonly used and closely watched measure of inflation. However, it has limitations. What are they? Economists maintain that the CPI, which is a common measure of inflation, overstates the true rate of i nflation by well-nigh one percentage point per year. This is primarily due to the event that the CPI is measured using a fixed basket of goods. The bias in the CPI arises from several sources. First, consumers buying patterns change, and in particular, consumers can substitute past from higher priced goods towards less expensive substitutes.A second source of bias arises from the fact that quality advantages are not always adjusted for, so what looks akin a higher price may simply be an improvement in quality. 10. Assuming a constant nominal GDP, would the velocity of M1 equal the velocity of M2? Explain. No, the velocity of M1 would be greater than the velocity of M2. The formula for velocity is nominal GDP/M. Given a constant numerator and the fact that M2 M1 the velocity of M1 has to exceed the velocity of M2.