Use the following diagram to answer the following questions.

-Suppose monetary authorities allow the money supply to grow at a constant rate of 3 percent. During this same period, the economy experiences inflation. What is the most likely explanation for this phenomenon?

Question

Use the following diagram to answer the following questions.
 
-Suppose monetary authorities allow the money supply to grow at a constant rate of 3 percent. During this same period, the economy experiences inflation. What is the most likely explanation for this phenomenon?

Quizplus · Accepted Answer

If the money supply is growing at a constant rate of 3 percent and the economy experiences inflation, it is likely due to an increase in the income velocity of money. This means that people are spending money at a faster rate, which can drive up prices and contribute to inflation.

Use the Following Diagram to Answer the Following Questions