An increase in the quantity of money causes inflation because businesses increase output to meet the demand from consumers with more money, pushing up nominal GDP.

Question

Quizplus · Accepted Answer

An increase in the quantity of money causes inflation primarily because it reduces the value of money, leading to higher prices, rather than directly causing businesses to increase output. The relationship between money supply and inflation is more directly linked through demand-pull inflation, where increased money supply boosts consumer spending, leading to higher demand and subsequently higher prices when supply cannot instantly adjust.

An Increase in the Quantity of Money Causes Inflation Because