The inflation rate in Venezuela has increased between 2005 and 2010, rising from 14 percent per year to 31 percent per year. At the same time, the growth rate of real GDP fell from 10 percent per year to -2.6 percent per year. The quantity theory of money
A) states that the inflation rate over the period would average 4 percent.
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) predicts that nominal GDP will decrease over the period.

Question

Quizplus · Accepted Answer

The quantity theory of money suggests that if the inflation rate increases and the real GDP growth rate decreases, then the growth rate of the money supply must have increased to cause the higher inflation. This theory posits a direct relationship between the money supply in an economy and the level of prices of goods and services sold.

The Inflation Rate in Venezuela Has Increased Between 2005 and 2010