Figure 8.1: Money Growth and Inflation in the United States by Decade
-The data presented in Figure 8.1 confirm that the relationship between inflation and money growth is ________, as suggested by ________.

Question

Figure 8.1: Money Growth and Inflation in the United States by Decade 
-The data presented in Figure 8.1 confirm that the relationship between inflation and money growth is ________, as suggested by ________.

Quizplus · Accepted Answer

The data presented in Figure 8.1 show a positive relationship between inflation and money growth, which aligns with the quantity theory of money. According to this theory, an increase in the money supply leads to an increase in prices. The Fisher equation suggests a relationship between nominal interest rates, real interest rates, inflation, and expected inflation. Money neutrality, on the other hand, asserts that changes in the money supply have no effect on real economic variables such as output and employment in the long run.

Figure 81: Money Growth and Inflation in the United States by by Decade