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?

Compare and contrast questions Your answers to include reference to the following key ideas: 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. Compare the two situations given for the impacts /flow on effects to society. What is the same for both situations. 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.

MV=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

M – Money supply V- Velocity 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. 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.

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 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 MV=PQ – causes why and how

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