According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:
A)increasing.
B)decreasing. 7
C)percent.
D)constant.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the equation is MV=PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. If M is growing at 10% and Y is growing at 3%, but V is increasing at a faster rate due to financial innovation, there will be an excess supply of money in the economy. This excess will lead to an increase in the price level (inflation). Therefore, the rate of inflation must be increasing.

According to the Quantity Theory of Money, If Money Is