The table below shows data for Indonesia between 2005 and 2006.

Assume the rate of velocity change is constant. According to the quantity theory of money, Indones inflation rate
A) is 27.1 percent in 2005.
B) is higher in 2005 than in 2006.
C) was 17.5 percent in 2006.
D) will increase over the 12 months.

Question

The table below shows data for Indonesia between 2005 and 2006.

Assume the rate of velocity change is constant. According to the quantity theory of money, Indones inflation rate
A) is 27.1 percent in 2005. 
B) is higher in 2005 than in 2006. 
C) was 17.5 percent in 2006. 
D) will increase over the 12 months.

Quizplus · Accepted Answer

According to the quantity theory of money, the equation is MV=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output. Assuming the rate of velocity change is constant, we can solve for the inflation rate as (M2/M1) - 1 = (P2/P1) - 1. Using the data provided in the table, we can calculate the inflation rate for 2005 as (102/80)-1 = 0.275 or 27.5%, and for 2006 as (124/105)-1 = 0.180 or 18%. Therefore, option B is correct as the inflation rate was higher in 2005 than in 2006.

The Table Below Shows Data for Indonesia Between 2005 and 2006