ECONOMICS
INFLATION
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
a proportional increase in prices.
|
|
|
a proportional increase in real output.
|
|
|
a proportional decrease in velocity.
|
|
|
a proportional increase in velocity.
|
|
|
a proportional decrease in prices.
|
Detailed explanation-1: -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-2: -The quantity theory of money states that the value of money is based on the amount of money in the economy. Thus, according to the quantity theory of money, when the Fed increases the money supply, the value of money falls and the price level increases.
Detailed explanation-3: -According to the quantity theory of money, the general price level of goods and services is proportional to the money supply in an economy-assuming the level of real output is constant and the velocity of money is constant.
Detailed explanation-4: -An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production.
Detailed explanation-5: -Definition: Quantity theory of money states that money supply and price level in an economy are in direct proportion to one another. When there is a change in the supply of money, there is a proportional change in the price level and vice-versa.