ECONOMICS
INFLATION
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
the quantity demanded of money falls by half.
|
|
|
the value of money has been cut by half.
|
|
|
nominal income is unaffected.
|
|
|
none of these answers.
|
|
|
the money supply has been cut by half.
|
Detailed explanation-1: -According to the quantity theory of money, if the amount of money in an economy doubles, all else equal, price levels will also double. This means that the consumer will pay twice as much for the same amount of goods and services.
Detailed explanation-2: -The value of money decreases as goods and services become more expensive when the price level rises. This is because more money needs to be paid for the same number of units as before. The value of each unit of money has fallen so that more of it is required to purchase an item.
Detailed explanation-3: -The intuition behind the real wealth effect is that when the price level decreases, it takes less money to buy goods and services. The money you have is now worth more and you feel wealthier.
Detailed explanation-4: -Value of money is what one unit of money can buy and price level is the average of prices of all the goods and services within an economy. So when the price level increases the value of money goes down and vis a versa. Hence the relationship between price level in an economy and value of money is inverse.