a. Comment on the trends in the inflation rate and money supply from 2004 to 201

Question

a. Comment on the trends in the inflation rate and money supply from 2004 to 2010.

b. Identify the relationship between the movement in the money supply and the inflation rate from 2004 to 2010 (e.g. positive, negative or no relationship). Use the data to provide a justification for your choice.  

Please provide references.

14 12 10 2000 2001 2002 20032004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 annual % 3.5 5.5 4.2 3.807|3722 6.886| 8.317|7.889 12048|758|10.547|b104|9264|52|7042 YEAR MONEY SUPPLY (M2) 2000 - 2014 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Senes1 13964.9 171996 17,510. 18,593. 20,841 28,012. 32,859. 37,309. 42,170 53544 56217. 64,009. 70,821. 77,034 871283

Explanation / Answer

a) From 2004 to 2010, inflation graph shows a clear upward trend rising from 3.5% to 10%

Money supply also shows upward trend rising from 20000 millions to 55000 millions by 2010.

b) Positive Relationship.

When the inflation increases, money supply also increases as the nominal value of money goes down.

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