When consumers reduce spending,the reduction in the velocity of money is split between:
A) a decrease in growth and an increase in inflation.
B) a decrease in growth and a decrease in inflation.
C) a decrease in money supply and a decrease in growth.
D) a decrease in money supply and decrease in inflation.

Question

Quizplus · Accepted Answer

When consumers reduce spending, there is a decrease in the velocity of money, which means money is changing hands less frequently. This leads to a decrease in economic growth as businesses see a reduction in demand for their goods and services. However, this reduction in demand also leads to a decrease in inflation as prices are not rising due to the lack of demand. Therefore, option B is the correct choice as it correctly identifies the effects of a reduction in spending.

When Consumers Reduce Spending,the Reduction in the Velocity of Money