### Exploring the Quantity Theory

4. In a description of the economic life in a prisoner-of-war camp, R.A. Radford said that during heavy air raids in the vicinity of the camp, prisoners would smoke heavily because of nervousness. Given that cigarettes were also used as money, what effect should the heavy air raids have had on the price level in the camp? Explain, using the quantity theory of money.

5. People do not usually hold wealth in the form of milk. Why not? Does the fact that milk is a poor way to hold wealth mean that people hold none of it? Explain. How high would the rate of inflation have to be so that you would prefer to hold wealth in the form of milk rather than money? (Comment: There have been hyperinflations in which milk has been a better store of value than money. Strange things happen with hyperinflation.)

6. Below is a table showing money (M1) for 1929 to 1933.

 Year Money (billions of dollars) Predicted GNP Actual GNP (billions of dollars) 1929 \$25.6 --- \$103 1930 25.5 90.7 1931 23.5 76.1 1932 20.6 58.3 1933 19.5 55.8

a) What would the simple quantity theory of money have predicted for these years given that GNP in 1929 was \$103 billion? (Hint: Compute velocity for 1929, then use it to predict GNP for the rest of the years.)
b) Historical GNP for 1930 to 1933 was, in billions, \$90.7, \$76.1, \$58.3, and \$55.8. What do you conclude about what happened to velocity? Is this change in velocity something that one should expect?