ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A Cost-push inflation is likely to occur when the government increases its expenditure.
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B Demand-pull inflation is likely to occur when the country’s exchange rate appreciates.
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C The Quantity Theory of Money predicts that changes in money supply can cause inflation.
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D When inflation is unanticipated real values remain unchanged.
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Detailed explanation-1: -According to monetarists, a rapid increase in the money supply can lead to a rapid increase in inflation. This is because when money growth surpasses the growth of economic output, there is too much money backing too little production of goods and services.
Detailed explanation-2: -The Quantity Theory of Money relates inflation to the rate of money growth, positing essentially a one-for-one relationship: therefore, to keep inflation low, central banks ought to keep the rate of money growth low.
Detailed explanation-3: -The monetary theory of inflation asserts that money supply growth is the cause of inflation. Faster money supply growth causes faster inflation. In particular, 1% faster money supply growth causes 1% more inflation. With other things constant, the price level is proportional to the money supply.
Detailed explanation-4: -The rate of inflation in the economy is determined by the supply of money. When the supply of money in the economy increases, so does inflation, and vice versa. The central bank’s currency is a liability of both the central bank and the government.