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AP Macroeconomics Practice Quiz: Money Growth and Inflation

Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026

Test your understanding with short quizzes. This quiz has 10 questions to check your progress.

Question 1 of 10

According to the quantity theory of money, if the money supply is $500 billion, the velocity of money is 4, and the real output is $1,000 billion, what is the price level?

All Questions (10)

According to the quantity theory of money, if the money supply is $500 billion, the velocity of money is 4, and the real output is $1,000 billion, what is the price level?

A) 0.5

B) 2.0

C) 8.0

D) 2,000

Correct Answer: B

The quantity theory of money is expressed as M * V = P * Y. Plugging in the given values: $500 billion * 4 = P * $1,000 billion. This simplifies to $2,000 billion = P * $1,000 billion. Solving for P gives P = 2.0.

Based on the provided text, what is the primary cause of sustained inflation over time?

A) A continuous decrease in the velocity of money.

B) The government consistently increasing taxes.

C) The money supply increasing at too rapid a rate.

D) A long-term increase in real output.

Correct Answer: C

The content explicitly states that 'Inflation... results from increasing... the money supply at too rapid of a rate for a sustained period of time.'

If an economy is at full employment, what is the long-run effect of a significant increase in the money supply?

A) An increase in real output and an increase in the price level.

B) A decrease in real output and an increase in the price level.

C) No effect on real output and an increase in the price level.

D) An increase in real output and no effect on the price level.

Correct Answer: C

The text states, 'When the economy is at full employment, changes in the money supply have no effect on real output in the long run.' An increase in the money supply will, however, lead to a higher price level (inflation).

In the long run, the quantity theory of money suggests that the inflation rate is primarily determined by the

A) growth rate of real output.

B) growth rate of the money supply.

C) change in the velocity of money.

D) level of unemployment.

Correct Answer: B

As stated in the provided content, 'In the long run, the growth rate of the money supply determines the growth rate of the price level (inflation rate) according to the quantity theory of money.'

A country's nominal output is $20 trillion and its money supply is $4 trillion. According to the quantity theory of money, what is the velocity of money?

A) 0.2

B) 5

C) 16

D) 80

Correct Answer: B

The quantity equation is M * V = P * Y. The term P * Y represents nominal output. Therefore, $4 trillion * V = $20 trillion. Solving for V, we get V = $20 trillion / $4 trillion = 5.

Assume the velocity of money is constant and real GDP is growing at 2% per year. If a central bank wants to maintain an inflation rate of 3%, at what rate should it grow the money supply?

A) 1%

B) 1.5%

C) 3%

D) 5%

Correct Answer: D

The quantity theory can be expressed in growth rates: %ΔM + %ΔV = %ΔP + %ΔY. Given %ΔV = 0, %ΔY = 2%, and the target %ΔP (inflation) is 3%, the equation becomes %ΔM + 0% = 3% + 2%. Therefore, the growth rate of the money supply (%ΔM) must be 5%.

Which of the following scenarios would most likely lead to a sustained period of deflation, based on the provided text?

A) A sustained increase in the money supply.

B) A sustained decrease in the money supply.

C) A one-time increase in real output.

D) A one-time decrease in the velocity of money.

Correct Answer: B

The text states that 'deflation results from... decreasing the money supply at too rapid of a rate for a sustained period of time.'

The principle that changes in the money supply do not affect real variables like output in the long run is a key aspect of

A) the short-run Phillips curve.

B) the theory of fiscal policy.

C) the quantity theory of money.

D) the theory of comparative advantage.

Correct Answer: C

The provided content, which focuses on the quantity theory of money, explicitly states that 'When the economy is at full employment, changes in the money supply have no effect on real output in the long run.' This concept is central to the quantity theory's long-run perspective.

The quantity theory of money is used to explain the relationship between the money supply and which of the following?

A) The unemployment rate

B) The balance of trade

C) The price level

D) Government spending

Correct Answer: C

The quantity theory of money, M * V = P * Y, directly links the money supply (M) and velocity (V) to the price level (P) and real output (Y). It is primarily used to explain how changes in the money supply affect the price level, especially in the long run.

If a country's money supply is $2 trillion, its price level is 1.5, and its real output is $8 trillion, what must the velocity of money be?

A) 4

B) 6

C) 12

D) 24

Correct Answer: B

Using the quantity equation M * V = P * Y, we have $2 trillion * V = 1.5 * $8 trillion. This simplifies to $2 trillion * V = $12 trillion. To solve for V, divide both sides by $2 trillion: V = $12 trillion / $2 trillion = 6.