AP Macro AP Macro Money and Inflation 1

Question 1

The quantity theory of money is expressed as MV = PQ. What does 'V' represent?

Accepted Answer

The velocity of money

Answer

V represents the velocity of money, or how many times a dollar is spent in a given period.

Question 2

Which type of inflation is caused by increases in production costs such as rising wages or raw material prices?

Accepted Answer

Cost-push inflation

Answer

Cost-push inflation occurs when rising production costs force producers to raise prices, shifting the aggregate supply curve left.

Question 3

If the money supply grows faster than real GDP, the most likely result according to the quantity theory is:

Accepted Answer

Inflation

Answer

When money supply growth outpaces real output growth, more money chases the same goods, driving up the price level.

Question 4

Which of the following groups is MOST harmed by unexpected inflation?

Accepted Answer

Savers holding cash or fixed-income assets

Answer

Unexpected inflation erodes the real purchasing power of cash and fixed-income assets, hurting savers most.

Question 5

Hyperinflation is most directly associated with:

Accepted Answer

A government printing excessive amounts of money to finance deficits

Answer

Hyperinflation typically results from governments financing large deficits by rapidly expanding the money supply.

AP Practice Test