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Eco 4223 Exam 3 Exam latest update Practice Questions (Original) EXAM | 2026–2027 Latest
Update | Original Questions & Answers with Detailed Rationales | Graded A+
Section 1: The Quantity Theory of Money
Q1. The quantity theory of money is a theory of how:
A. The money supply is determined.
B. The real value of aggregate income is determined.
C. Interest rates are determined.
D. The nominal value of aggregate income is determined.
Correct Answer: D
Rationale: The quantity theory of money posits that the nominal
value of aggregate income (PY) is determined by the quantity of
money (M) in circulation, assuming velocity (V) is constant.
Q2. According to the quantity theory of money, if velocity is
constant, an increase in the money supply will lead to a
proportional increase in:
A. Real output.
B. The nominal value of aggregate income.
C. The unemployment rate.
D. The interest rate.
Correct Answer: B
Rationale: With velocity constant, the equation of exchange
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(MV = PY) implies that changes in M translate directly into
changes in PY (nominal income).
Q3. Fisher's quantity theory of money suggests that the
demand for money is purely a function of ______, and ______
have no effect on the demand for money.
A. Government spending; interest rates
B. Income; interest rates
C. Interest rates; income
D. Expectations; income
Correct Answer: B
Rationale: Fisher's version of the quantity theory asserts that
money demand depends solely on the level of transactions
(income) and is insensitive to interest rates.
Q4. In the quantity theory of money, velocity (V) is assumed to
be:
A. Highly volatile and unpredictable.
B. Constant in the short run.
C. Negatively related to the money supply.
D. Determined by the central bank.
Correct Answer: B
Rationale: Classical quantity theorists, including Fisher, assumed
that velocity is relatively constant in the short run, which is why
changes in M directly affect PY.
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Q5. The quantity theory of money implies that inflation is
primarily caused by:
A. Excessive growth in the money supply.
B. High interest rates.
C. Low levels of government spending.
D. Increases in the velocity of money.
Correct Answer: A
Rationale: If velocity and real output are constant, rapid money
supply growth translates into proportional increases in the price
level (inflation).
Q6. If the money supply grows by 10% and velocity is constant
while real output grows by 3%, the inflation rate according to
the quantity theory is approximately:
A. 3%
B. 7%
C. 10%
D. 13%
Correct Answer: B
Rationale: Using %ΔM + %ΔV ≈ %ΔP + %ΔY, with %ΔV = 0, we
get 10% ≈ %ΔP + 3%, so %ΔP ≈ 7%.
Q7. Which of the following is a key assumption of the quantity
theory of money?
A. Velocity is highly variable.
B. Real output is determined by the money supply.
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C. Velocity is constant.
D. Interest rates directly determine money demand.
Correct Answer: C
Rationale: The classical quantity theory rests on the assumption
that velocity is constant (or at least predictable), making the
money supply the primary determinant of nominal income.
Q8. The quantity theory of money is most closely associated
with which economist?
A. John Maynard Keynes
B. Milton Friedman
C. Irving Fisher
D. James Tobin
Correct Answer: C
Rationale: Irving Fisher formalized the equation of exchange
(MV = PY) and is a central figure in the quantity theory tradition.
Q9. In the quantity theory equation MV = PY, what does PY
represent?
A. Real income.
B. The price level.
C. Nominal income.
D. The money multiplier.
Correct Answer: C
Rationale: P is the price level and Y is real output, so PY is
nominal income (or nominal GDP).
Eco 4223 Exam 3 Exam latest update Practice Questions (Original) EXAM | 2026–2027 Latest
Update | Original Questions & Answers with Detailed Rationales | Graded A+
Section 1: The Quantity Theory of Money
Q1. The quantity theory of money is a theory of how:
A. The money supply is determined.
B. The real value of aggregate income is determined.
C. Interest rates are determined.
D. The nominal value of aggregate income is determined.
Correct Answer: D
Rationale: The quantity theory of money posits that the nominal
value of aggregate income (PY) is determined by the quantity of
money (M) in circulation, assuming velocity (V) is constant.
Q2. According to the quantity theory of money, if velocity is
constant, an increase in the money supply will lead to a
proportional increase in:
A. Real output.
B. The nominal value of aggregate income.
C. The unemployment rate.
D. The interest rate.
Correct Answer: B
Rationale: With velocity constant, the equation of exchange
, Page |2
(MV = PY) implies that changes in M translate directly into
changes in PY (nominal income).
Q3. Fisher's quantity theory of money suggests that the
demand for money is purely a function of ______, and ______
have no effect on the demand for money.
A. Government spending; interest rates
B. Income; interest rates
C. Interest rates; income
D. Expectations; income
Correct Answer: B
Rationale: Fisher's version of the quantity theory asserts that
money demand depends solely on the level of transactions
(income) and is insensitive to interest rates.
Q4. In the quantity theory of money, velocity (V) is assumed to
be:
A. Highly volatile and unpredictable.
B. Constant in the short run.
C. Negatively related to the money supply.
D. Determined by the central bank.
Correct Answer: B
Rationale: Classical quantity theorists, including Fisher, assumed
that velocity is relatively constant in the short run, which is why
changes in M directly affect PY.
, Page |3
Q5. The quantity theory of money implies that inflation is
primarily caused by:
A. Excessive growth in the money supply.
B. High interest rates.
C. Low levels of government spending.
D. Increases in the velocity of money.
Correct Answer: A
Rationale: If velocity and real output are constant, rapid money
supply growth translates into proportional increases in the price
level (inflation).
Q6. If the money supply grows by 10% and velocity is constant
while real output grows by 3%, the inflation rate according to
the quantity theory is approximately:
A. 3%
B. 7%
C. 10%
D. 13%
Correct Answer: B
Rationale: Using %ΔM + %ΔV ≈ %ΔP + %ΔY, with %ΔV = 0, we
get 10% ≈ %ΔP + 3%, so %ΔP ≈ 7%.
Q7. Which of the following is a key assumption of the quantity
theory of money?
A. Velocity is highly variable.
B. Real output is determined by the money supply.
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C. Velocity is constant.
D. Interest rates directly determine money demand.
Correct Answer: C
Rationale: The classical quantity theory rests on the assumption
that velocity is constant (or at least predictable), making the
money supply the primary determinant of nominal income.
Q8. The quantity theory of money is most closely associated
with which economist?
A. John Maynard Keynes
B. Milton Friedman
C. Irving Fisher
D. James Tobin
Correct Answer: C
Rationale: Irving Fisher formalized the equation of exchange
(MV = PY) and is a central figure in the quantity theory tradition.
Q9. In the quantity theory equation MV = PY, what does PY
represent?
A. Real income.
B. The price level.
C. Nominal income.
D. The money multiplier.
Correct Answer: C
Rationale: P is the price level and Y is real output, so PY is
nominal income (or nominal GDP).
