ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A rapidly changing velocity of money
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The money supply increase too rapidly for a long time
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The money supply decreases faster than real output decreases
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Any decrease in the money supply
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Detailed explanation-1: -There are two big causes of deflation: a decrease in demand or growth in supply. Each is tied back to the fundamental economic relationship between supply and demand. A decline in aggregate demand leads to a fall in the price of goods and services if supply does not change.
Detailed explanation-2: -The monetarist theory, as popularized by Milton Friedman, asserts that money supply is the primary factor in determining inflation/deflation in an economy.
Detailed explanation-3: -Causes of Deflation A decline in aggregate demand typically results in subsequent lower prices. Causes of this shift include reduced government spending, stock market failure, consumer desire to increase savings, and tightening monetary policies (higher interest rates).
Detailed explanation-4: -Fall in the money supply A central bank may use a tighter monetary policy by increasing interest rates. Thus, people, instead of spending their money immediately, prefer to save more of it. In addition, increasing interest rates lead to higher borrowing costs, which also discourages spending in the economy.
Detailed explanation-5: -Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).