The quantity theory of money is built around the "equation of exchange" that says =, where M is the money stock, V is the velocity of money in circulation, P is the price level, and Y is real GDP. The idea is that we can measure P and Y, and the product is nominal GDP; that we can measure M, and hence derive the "velocity of money" or the number of times in a year the average unit of money must change hands in order for this year's stock of M to be sufficient to finance the purchase of this year's nominal GDP. Here is some data on M (actually the Federal Reserve System's measure called M1), P (actually the GDP deflator), and Y (actually real GDP).

2018

2019

2020

M (M1)

$2,500 billion

$3,000 billion

$5,000 billion

Y (real GDP)

$12,222billion

$12,222billion

$12,222 billion

P * Y (nominal GDP)

$28,256 billion

P (price level)

V (velocity of money)

1.Using this data, calculate the price level for 2018.

a. $1.12

b. $2.31

c. $3.22

d. $4.85

2. Using this data, calculate the velocity of money in 2018.

a. 14.2

b. 22.1

c. 11.3

d. 8.4

3.) The Quantity Theory argues that Y (real GDP) is not affected at least in the long run by changes in M. The Quantity Theory also argues that V (velocity) is fairly constant and is also not affected at least in the long run by changes in M. If real GDP and velocity are constant between 2018 and 2020, and M1 increases from $2,500 billion in 2018 to $3,000 billion in 2019, what does the Quantity Theory predict will be the price level in 2019?

a. $2.77

b. $2.1

c. $1.3

d. $4.4

4. The value of nominal GDP in 2019?

a. $33,855

b. $22,123

c. $11,988

d. $30,435

5. What does the quantity equation predict will be the percent change in nominal GDP between 2018 and 2019?

a. 14%

b. 20%

c. 17%

d. 25%

6. If M1 increases from $3,000 billion in 2019 to $5,000 billion in 2020, what does the Quantity Theory predict will be the price level in 2020?

a.$4.21

b.$3.11

c.$4.62

d. $8.41

7. The value of nominal GDP in 2020?

a. $60,233

b. $52,564

c. $65,200

d. $56,500

8. What does the quantity equation predict will be the percent change in nominal GDP between 2018 and 2020?

a. 78%

b.22%

c.86%

d. 100%