Question

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:

Answer 1

Answer:

The inflation will increase

Explanation:

The formula derived by the Quantity theory of money is as under:

P = MV/T

P - The price of goods or product which also includes the inflation factor.

M - M is the supply of the money in an economy

V - V is the velocity of the money circulation

T - Transaction Value

So if the Supply of money is increasing with 10%, T is growing with 3 percent (denominator) and the V is also growing with faster rates then this means that the nominator will increase with higher rates than the nominator. So this will increase the price which means inflation will be increasing.