Question 1
The quantity theory of money can be explained using Irving Fisher’s equation of exchange, MV=PQ. Monetarist economists believe that the theory helps to explain inflation because some parts of the equation are normally stable. Which parts of the equation do monetarist economists normally consider to be stable?
Answer: D.
Options A, B, and C are incorrect because they include variables that monetarists believe are highly unstable or directly affected by changes in money supply. Specifically, monetarists contend that the money supply (M) is the active policy variable and the price level (P) is the dependent variable that adjusts to changes in M, meaning these are not considered stable in the way V and Q are.
What this practice covers
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. Each one is marked the moment you pick, the correct option is shown whether or not you found it, and the full explanation opens either way. No account needed to answer them.
These questions are drawn from past AQA A-Level papers. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on inflation, employment and the balance of payments, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Confusing deflation (falling prices) with disinflation (slowing inflation).
- Treating all inflation as demand-pull, the diagram and the policy differ entirely for cost-push.
- Saying inflation is always harmful; moderate, stable inflation is preferred to deflation.
- Confusing cyclical with structural unemployment. The policy response is completely different.
- Saying the natural rate can be lowered by raising AD, only supply-side policy lowers it.
- Treating a current account deficit as automatically bad without asking what is causing it.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Inflation, Employment and the Balance of Payments revision notes.