The table below shows data for Indonesia between 2005 and 2006.

Assume the rate of velocity change is constant. According to the quantity theory of money, Indonesia's inflation rate

Question

The table below shows data for Indonesia between 2005 and 2006.

Assume the rate of velocity change is constant. According to the quantity theory of money, Indonesia's inflation rate

Quizplus · Accepted Answer

According to the quantity theory of money, inflation is directly proportional to the growth rate of the money supply and the velocity of money. Here, we can assume the rate of velocity change to be constant. So, if we look at the data, we see that money supply has increased by 44.4% from 2005 to 2006 while the GDP has increased only by 22.2%. This means that the velocity has decreased, which will lead to a higher inflation rate in 2005 compared to 2006. Therefore, option A is the correct answer.

The Table Below Shows Data for Indonesia Between 2005 and 2006