Question

The figure below shows the growth in the money supply and average inflation rates for 160 countries from 1991–2011. For most countries, there is a one-to-one ratio between money growth and inflation. For example, both the growth in the money supply and the average inflation rate was close to 100% in Belarus.



Refer to the figure to answer the following questions.

Average 400% rate of inflation Angola (percent) 350 One-to-one ratio Brazil 300 250 200 Ukraine 149 nations 150 Armenia Azerbaijarn Belarus 100 50 Guinea Nicaragua 0 150 400 Money supply growth rate 0 50 100 200 250 300 350

1st attempt

Part 1   (1 point)

See Hint

Consider the countries that lie on the line, which shows a one-to-one ratio of the money supply growth rate to the average rate of inflation. For these countries, is the percentage change in velocity Greater than, Equal to, or Less than the percentage change in real GDP? _______

Part 2

Look at Armenia. The money supply growth rate and the average rate of inflation are 120%. If the growth rate in real GDP was 80%, the percent change in velocity would be __%.

Part 3

Look at Nicaragua. The money supply growth rate is 90%, and the average rate of inflation is 25%. If the growth rate in real GDP was 30%, the percent change in velocity would be __%.

Part 4

Finally, look at Brazil. The money supply growth rate is 340%, and the average rate of inflation is 325%. If the growth rate in real GDP was 40%, the percent change in velocity was __%.

Answer 1

We know that as per quantity theory of money MV=PY where M is money supply, V is velocity of money, P is price level and Y is real GDP. In terms of growth rate

Growth rate of money supply + growth rate of velocity = inflation rate + real GDP growth

Part1

If money supply growth rate is same as that of inflation rate then by the above formula it can be seen that growth rate of velocity will be equal to GDP growth rate.

Part 2

Growth rate of money supply + growth rate of velocity = inflation rate + real GDP growth

120% + growth rate of velocity = 120% + 80%

growth rate of velocity = 80%

Part 3

Growth rate of money supply + growth rate of velocity = inflation rate + real GDP growth

90% + growth rate of velocity = 25% + 30%

growth rate of velocity = -35%

Part 4

Growth rate of money supply + growth rate of velocity = inflation rate + real GDP growth

340% + growth rate of velocity = 325% + 40%

growth rate of velocity = 25%