Let’s have some practice with the dynamic aggregate demand curve. If you want to draw it in your familiar y = b + mx format, you can think of it this way:
Inflation = (Growth in money 1 Growth in velocity) – Real growth
a. When you look at a fixed dynamic aggregate demand curve, like in Figure 32.3, what is being held constant (choose one):
Spending growth (growth in M 1 growth in v)
Real GDP growth (growth in Y)
Inflation (growth in P)
b. When you look at a shifting aggregate demand curve, like in Figure 32.4, what had to change to make the curve shift (choose one):
Spending growth (growth in M 1 growth in v)
Real GDP growth (growth in Y)
Inflation (growth in P)
c. According to the quantity theory, which of the following statements must be false, and why? More than one may be false.
“Last year, spending grew at 10% real growth was 4%, and inflation was 6%.”
“Last year, spending grew at 4%, real growth was 22%, and inflation was 6%.”
“Last year, spending grew at 100%, real growth was 0%, and inflation was 20%.”
“Last year, spending grew at 5%, real growth was 5%, and inflation was 2%.”
“Last year, spending grew at 10%, real growth was 5%, and inflation was 25%.”