If the quantity of money starts to grow more rapidly than real GDP and velocity does not change, the result is
A) more rapid growth in potential GDP.
B) the inflation rate rises.
C) an increase in investment.
D) an eventual slowing in the growth rate of the quantity of money.
E) slower growth in the price level.

Question

Quizplus · Accepted Answer

When the quantity of money grows more rapidly than real GDP, the result is an increase in aggregate demand which leads to higher prices and ultimately inflation. This is because if the money supply increase faster than the amount of goods and services produced in the economy (real GDP), each unit of currency will be worth less in terms of goods and services causing the prices to rise.

If the Quantity of Money Starts to Grow More Rapidly