Question

In: Economics

1. can you answer the question with fewer couple words for each part? a.can there be...

1. can you answer the question with fewer couple words for each part?

a.can there be any inflation without an increase in the money supply? how?

b.could long-term interest rates rise when short-term rates are falling? what would cause such a pattern?

Solutions

Expert Solution

Answer to first question is provided :

a) Can there be any inflation without an increase in the money supply? how?

Answer : Yes there can be inflation without increase in money supply . This can be shown by the quantity theory of money equation : M*V= P*Y

where,

M = Money supply

V = Velocity of money

P = Price level

Y = Real GDP

In percentage change form :

%M + % V = %P + %Y

Which means : Change in money supply + Change in velocity = Inflation + GDP growth

So from the above equation we can easily see that inflation can occur even if velocity of money increases , although money supply and GDP growth is constant . The velocity of circulation or the number of times a dollar exchanges hands in an economy rises when spending rises in the economy due to some reason . If spending rises , aggregate demand rises which causes inflation even if money supply and amount of goods and services produced remain unchanged .


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