Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can explain why inflation that lasts is caused by money growth that is too fast for too long, and why a sustained fall in the money supply causes deflation. (Guide: “Inflation as a monetary event”; Practice Q7(a), Q7(c))
- I can state the equation of exchange and say what M, V, P and Y each measure. (Guide: “The equation of exchange”; Practice Q1)
- I can define the quantity theory of money and name its two assumptions. (Guide: “The quantity theory of money”; Practice Q2)
- I can explain why money does not change real output in the long run when the economy is at full employment. (Guide: “The quantity theory of money”; Practice Q2, Q4)
Calculation
- I can find velocity from nominal GDP and the money supply. (Guide: Worked example 1; Practice Q5)
- I can rearrange MV = PY to find the price level, real output or the money supply. (Guide: Worked example 1; Practice Q1, Q5(a)–(c), Q7(b))
- I can estimate long-run inflation from the growth rates of money, velocity and real GDP. (Guide: Worked example 2; Practice Q3, Q7(a))
- I can calculate an exact inflation rate from price levels and compare it with the growth-rate estimate. (Guide: Worked example 2; Practice Q5(b), Q7(b))
Reasoning and graphs
- I can draw an AD–AS graph showing the short-run and long-run effects of an increase in the money supply. (Guide: “Showing it on an AD–AS graph”; Practice Q4, Q6)
- I can explain how a change in velocity changes inflation for a given rate of money growth. (Guide: “When velocity changes”; Practice Q5(d))
- I can explain why a one-time rise in the money supply gives a one-time rise in the price level, not continuing inflation. (Practice Q7(c))
All ticked? Move on to Topic 5.4, Government Deficits and the National Debt, or return to the course roadmap.