MV=PQ questions1. 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

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 exchange, 2 country model, world market /Demand supply market

S 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 to society. What is the same for both situations.

C 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.

Your answers to include reference to the following key ideas:

MV=PQ answersMV = PQ where M = money supply, V = velocityP= 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 V- Velocity

– 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.

– 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.

MV=PQ – causes why and howSituation 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 riseConsumer 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