According to monetarist theory, what happens if the money supply increases more rapidly than real output?

Choose 1 answer:
(A) The velocity of money decreases.
(B) Deflation occurs.
(C) Nominal output decreases.
(D) Inflation occurs.
(E) The velocity of money increases.

Question

According to monetarist theory, what happens if the money supply increases more rapidly than real output?

Choose 1 answer:
(A) The velocity of money decreases.
(B) Deflation occurs.
(C) Nominal output decreases.
(D) Inflation occurs.
(E) The velocity of money increases.

Accepted Answer

∻Solution∻ ‖ a ⋮ Monetarist Theory: According to monetarist theory, the money supply and price levels are directly related. ‖ ‖ b ⋮ Quantity Theory of Money: The equation of exchange is given by $MV = PQ$, where $M$ is the money supply, $V$ is the velocity of money, $P$ is the price level, and $Q$ is the real output. ‖ ‖ c ⋮ Money Supply Increase: If the money supply ($M$) increases more rapidly than real output ($Q$), and assuming the velocity of money ($V$) is constant, the price level ($P$) must increase to maintain the equality. ‖ ‖ d ⋮ Inflation: An increase in the price level ($P$) is defined as inflation. ‖ ∻Answer∻ ⚹ (D) Inflation occurs ⚹ ∻Key Concept∻ ⚹ Inflation ⚹ ∻Explanation∻ ⚹ According to monetarist theory, if the money supply increases more rapidly than real output, it leads to an increase in the price level, resulting in inflation. ⚹◊How does an increase in the money supply compared to real output impact inflation according to monetarist theory?⍭ Generate me a similar question◊

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