It has been shown that increases in the money supply are directly related to the rate of inflation.If the previous statement is true,then:
A) nations that increase their money supply most rapidly will be the most prosperous.
B) hyperinflation will normally be associated with large increases in the money supply.
C) hyperinflation will normally be associated with large decreases in the money supply.
D) menu costs will rise when the money supply falls.
E) real wages rise whenever the money supply increases.

Question

Quizplus · Accepted Answer

The statement implies that increases in the money supply lead to inflation. In cases of excessive increases in the money supply, hyperinflation can occur. Therefore, hyperinflation is more likely to be associated with large increases in the money supply, as stated in option B. Option A is incorrect because rapid increases in the money supply can lead to inflation and currency devaluation, which can ultimately harm the economy. Option C is incorrect because large decreases in the money supply can lead to deflation and economic recession. Option D is unrelated to the statement, and option E is not necessarily true as the relationship between the money supply and real wages is more complex.

It Has Been Shown That Increases in the Money Supply