AP Macroeconomics Flashcards: Money Growth and Inflation
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 10 cards to help you master important concepts.
Using the quantity theory of money, if the money supply is $1,000, velocity is 5, and real output is 2,500 units, what is the price level?
The price level is $2. The quantity equation is M x V = P x Y, so P = (M x V) / Y, which is ($1,000 x 5) / 2,500 = $2.
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Using the quantity theory of money, if the money supply is $1,000, velocity is 5, and real output is 2,500 units, what is the price level?
The price level is $2. The quantity equation is M x V = P x Y, so P = (M x V) / Y, which is ($1,000 x 5) / 2,500 = $2.
What is the primary cause of sustained inflation?
Sustained inflation results from the money supply increasing at too rapid of a rate for a sustained period of time.
What is the quantity theory of money?
The quantity theory of money states that in the long run, the growth rate of the money supply determines the growth rate of the price level (the inflation rate).
If the central bank announces a policy that will increase the money supply growth rate from 2% to 6% per year, what is the predicted long-run impact on the inflation rate?
According to the quantity theory of money, the long-run inflation rate will also increase from approximately 2% to 6% per year.
Does a sustained increase in the money supply affect the economy's real output in the long run?
No, when the economy is at full employment, changes in the money supply do not affect real output in the long run; they only affect the price level.
Why is inflation described as a monetary phenomenon?
Inflation is considered a monetary phenomenon because it results from the money supply increasing too rapidly over a sustained period.
What is the long-run relationship between the money supply growth rate and the inflation rate?
In the long run, the growth rate of the money supply determines the growth rate of the price level, which is the inflation rate.
In the long run, what is the effect of a change in the money supply on real output when the economy is at full employment?
When the economy is at full employment, changes in the money supply have no effect on real output in the long run.
What causes deflation, according to the provided text?
Deflation results from decreasing the money supply at too rapid of a rate for a sustained period of time.
Using the quantity theory of money, if the price level is 3, real output is 4,000, and velocity is 6, what is the money supply?
The money supply is $2,000. The quantity equation is M x V = P x Y, so M = (P x Y) / V, which is (3 x 4,000) / 6 = $2,000.