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 ID: 760754
Download Presentation The PPT/PDF document "MV=PQ questions What is M , V, P, Q and ..." is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
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?
Slide2Compare and contrast questions
CConcepts must be defined and terms used correctly with depth in answers including the Why, What and How of the situation.MModels must be linked into your answers e.g. PPC, AD/AS, Foreign exchange, 2 country model, world market /Demand supply marketSSituation given – every example given must be referred to including product, country, shifts required, why and how detail.CCompare the two situations given for the impacts /flow on effects to society. What is the same for both situations.CContrast 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.
Your answers to include reference to the following key ideas:
Slide3MV=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
Slide4M – Money supply V- Velocity
Interest rates are lowered or increased by banksThe 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)
A
vailability 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.
Slide5P – 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.
I
n 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.
Slide6MV=PQ – causes why and how
Situation
Factor
Why how
Effect on MV
Effect on PQ
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
Slide7Answers
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 si
des 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.
Slide8Questions 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