Understanding Fisher’s Equation of Exchange: MV = PQ

Question 1

What is Irving Fisher’s Equation of Exchange?

Answer 1

MV = PQ

Question 2

What does M represent in Fisher’s Equation?

Answer 2

Money Supply: Total amount of money in circulation.

Question 3

What does V represent in Fisher’s Equation?

Answer 3

Velocity of Money: Rate at which money circulates in the economy.

Question 4

What does P represent in Fisher’s Equation?

Answer 4

Price Level: Aggregate level of prices.

Question 5

What does Q represent in Fisher’s Equation?

Answer 5

Real Output: Inflation-adjusted total production of goods/services.

Question 6

True or False: Fisher’s Equation of Exchange is always valid.

Answer 6

True

Question 7

The real-world application of Fisher’s Equation depends on what?

Answer 7

Assumptions made about its variables.

Question 8

What does Money Supply (M) refer to?

Answer 8

Total cash and deposits in an economy.

Controlled by central banks through interest rates and quantitative easing.

Question 9

What is the Velocity of Money (V)?

Answer 9

Measures how frequently a unit of currency is spent.

High V indicates an active economy; Low V indicates economic stagnation.

Question 10

What does the Price Level (P) determine?

Answer 10

Inflationary or deflationary pressures.

Question 11

What is Real Output (Q) equivalent to?

Answer 11

Real GDP; measures the economy’s total goods/services production.

Question 12

What is the long-term economic goal related to Real Output (Q)?

Answer 12

Full employment.

Question 13

True or False: The Money Supply is controlled by individual consumers.

Answer 13

False.

Question 14

Fill in the blank: High Velocity of Money indicates a(n) _______ economy.

Answer 14

active

Question 15

Fill in the blank: Low Velocity of Money indicates _______ stagnation.

Answer 15

economic

Question 16

What happens in the short run when there is an increase in M, assuming V is constant?

Answer 16

It leads to either demand-pull inflation or output expansion.

Question 17

What is demand-pull inflation?

Answer 17

It is when a higher money supply increases aggregate demand, pushing up prices.

Question 18

Under what condition can an increase in M boost output (Q) in the short run?

Answer 18

If the economy operates below full employment.

Question 19

In the long run, what determines Q according to the classical view?

Answer 19

Labor, capital, and technology.

Question 20

What happens to prices (P) once full employment is reached in the long run?

Answer 20

Increasing M only raises P, causing inflation.

Question 21

Who argued that inflation is always a monetary phenomenon?

Answer 21

Milton Friedman.

Question 22

Complete the quote: ‘Inflation is always and everywhere a _______.

Answer 22

monetary phenomenon.

Question 23

What do monetarists argue is the fundamental cause of inflation?

Answer 23

Inflation is fundamentally a monetary phenomenon.

Question 24

According to monetarists, what leads to higher aggregate demand?

Answer 24

An increase in the money supply.

Question 25

What happens to demand push when the economy reaches full employment?

Answer 25

It can only manifest as higher prices.

Question 26

Who famously stated that 'Inflation is always and everywhere a monetary phenomenon'?

Answer 26

Milton Friedman.

Question 27

What key assumption underpins the monetarist view regarding the velocity of money?

Answer 27

V is stable or predictable.

Question 28

What is the central variable in inflationary analysis according to monetarists?

Answer 28

M (the money supply).

Question 29

What historical events contributed to inflationary pressures in the 1970s?

Answer 29

An increase in the money supply and rising oil prices.

Question 30

Which equation helps explain the link between the money supply and price levels?

Answer 30

Fisher's equation.

Question 31

In scenarios where output (Q) is unable to keep pace with demand, what occurs?

Answer 31

Rising price levels.

Question 32

Fill in the blank: According to monetarists, inflation results from an increase in the _______.

Answer 32

money supply.

Question 33

What caused the Weimar Hyperinflation between 1921-1923?

Answer 33

Germany printed excessive money to pay war reparations ## Footnote This led to a significant increase in the money supply (high M).

Question 34

What was the relationship between real output (Q) and hyperinflation during the Weimar period?

Answer 34

Real output (Q) could not keep up, causing hyperinflation.

Question 35

How did fluctuating velocity (V) affect inflation during the Weimar Hyperinflation?

Answer 35

Fluctuating velocity (V) worsened inflation.

Question 36

What economic situation characterized the 1970s stagflation?

Answer 36

High inflation occurred alongside high unemployment.

Question 37

What happened to the money supply (M) during the 1970s stagflation?

Answer 37

Increased M, but V fell due to economic instability.

Question 38

How did Fisher's model relate to the dynamics of inflation during stagflation?

Answer 38

Fisher’s model oversimplified the dynamics, as V was not constant.

Question 39

What monetary policy did central banks use after the 2008 financial crisis?

Answer 39

Central banks expanded M via quantitative easing.

Question 40

Why did inflation remain low after the 2008 financial crisis despite increasing money supply?

Answer 40

Inflation remained low because V dropped (low spending, high savings).

Question 41

What did the post-2008 financial crisis demonstrate regarding changes in velocity (V)?

Answer 41

Changes in V can override effects of increasing M.

Question 42

Fill in the blank: Germany printed excessive money to pay war reparations, leading to _______.

Answer 42

hyperinflation.

Question 43

True or False: During the 1970s stagflation, both inflation and unemployment were low.

Answer 43

False.

Question 44

What economic condition existed when V fell during the 1970s stagflation?

Answer 44

Economic instability.

Question 45

Fill in the blank: The expansion of money supply via quantitative easing after the 2008 crisis led to _______ inflation.

Answer 45

low.

Question 46

What does V represent in Fisher's Equation (MV = PQ)?

Answer 46

Velocity of money

Question 47

True or False: V is considered constant in Fisher's Equation.

Answer 47

False

Question 48

What empirical data contradicts the assumption of constant V?

Answer 48

1970s stagflation, post-2008

Question 49

What factors affect the velocity of money (V)?

Answer 49

* Consumer confidence * Technological advances * Policy shifts

Question 50

What is the full employment assumption in economic theory?

Answer 50

The assumption that all resources are utilized efficiently

Question 51

True or False: Full employment is always realistic.

Answer 51

False

Question 52

What can increasing M (money supply) lead to when there is excess capacity?

Answer 52

Boost Q rather than P

Question 53

What are some structural and institutional factors that affect inflation?

Answer 53

* Labor markets * Trade balances * Global commodity prices

Question 54

What does Fisher's Equation (MV = PQ) provide a framework for?

Answer 54

Understanding monetary dynamics

Question 55

What must be acknowledged for the real-world application of Fisher's Equation?

Answer 55

The variability of V and deviations from full employment assumptions

Question 56

How does modern economic analysis differ from Fisher's model?

Answer 56

It incorporates complexities beyond Fisher’s model to better explain inflation and economic fluctuations