ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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5 per cent.
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more than 5 per cent.
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less than 5 per cent.
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none of these answers.
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Detailed explanation-1: -Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services.
Detailed explanation-2: -An increase in the money supply ( M) without an increase in output ( Y) causes the price level to change by the same change in the money supply. In other words, output doesn’t change, but when the money supply doubles, the price level also doubles.
Detailed explanation-3: -What Happens If Money Supply Growth Exceeds the Growth of the Overall Economy? If the money supply grows faster than overall economic growth, inflation will occur. If the difference between the money supply growth and the growth of the economy becomes too wide, hyperinflation occurs.
Detailed explanation-4: -Thus expansionary monetary policy (i.e., an increase in the money supply) will cause a decrease in average interest rates in an economy. In contrast, contractionary monetary policy (a decrease in the money supply) will cause an increase in average interest rates in an economy.