Question

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?

Answer 1

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 .