According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:
A) increasing.
B) decreasing.
C) 7 percent.
D) constant.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the inflation rate equals the growth rate of the money supply minus the growth rate of real output minus the growth rate of velocity. If money is growing at 10 percent and real output is growing at 3 percent, the growth rate of money minus the growth rate of real output is 7 percent. However, if velocity is growing at increasingly faster rates, it means people are spending their money faster, which puts upward pressure on prices. Therefore, the overall inflation rate will be increasing.

According to the Quantity Theory of Money, If Money Is