The inflation rate in Venezuela has increased between 2005 and 2008, rising from 14 percent per year to 37 percent per year. At the same time, the growth rate of real GDP fell from 10 percent per year to 5 percent per year. The quantity theory of money
A) predicts that nominal GDP will decrease over the period.
B) predicts that the velocity of money will decrease over the period.
C) states that the growth rate of money must have increased over the period.
D) states that the inflation rate over the period would average 4 percent.

Question

Quizplus · Accepted Answer

The quantity theory of money states that the growth rate of money is directly proportional to the inflation rate. Therefore, if the inflation rate has increased, the growth rate of money must have also increased. Option A is incorrect because the nominal GDP may still increase with inflation. Option B is also incorrect because the velocity of money is not given in the question. Option D is incorrect because the average inflation rate is not relevant to the question.

The Inflation Rate in Venezuela Has Increased Between 2005 and 2008