Chapter 33, Problem 1MCQ

To determine

The correct option for the real quantity of money.

Answer to Problem 1MCQ

From the available options, the correct option is equal to M/P.

Explanation of Solution

The real quantity of money would equal the M/P (nominal quantity of money/price index) and it can be adjusted to control the inflation in the economy because this quantity of money expresses the standard amount of goods and services in the country. Through the real quantity of money, it can be easy to adjust the price of goods and services so that inflation would be in control which means it would not be higher when the economy experiences inflation as it would be lower in the situation of inflation.

Moreover, the real quantity of money would not be higher in the long run when Fed purchased securities because bonds are purchased by Fed to increase the money supply in the free economy. And, this quantity would not be equal to real GDP in the short run as it is based on the standard amount of goods and services in the country.

Therefore, the correct option is a (equal to M/P) and all other options are incorrect.

Economics Concept Introduction

Introduction: The supply of money or the total amount of money that is available and circulated in the country is called the quantity of money, which can be the total of cash, coins, and bank balances.