An increase in money growth will cause the inflation rate to increase in:
A) the short run only.
B) the long run only.
C) both the short run and the long run.
D) neither the short run nor the long run.

Question

Quizplus · Accepted Answer

In the short run, an increase in money growth will increase spending and demand, causing an increase in prices i.e. inflation. In the long run, the increase in money supply may cause people to expect inflation and hence adjust their behavior, resulting in an increase in prices, leading to a continuous inflationary trend. Thus, an increase in money growth will cause inflation in both the short and long run.

An Increase in Money Growth Will Cause the Inflation Rate