On recent morning, a man stood in front of a stall lining bab serijeb market and

Question

On recent morning, a man stood in front of a stall lining bab serijeb market and expressed amazement at how price have quadrupled and quintupled over the last year, a professor of applied economic at JH Uni,estimates that inflation is running at 213% rate so far this year,hyperinflation is result of declining production and a sharp increase in money supply

a.      use equation of exchange to explain how 2 variables mention in the previou quote combine to lead to inflation

b.      what further impact do you believe this may have on the velocity of money, explain why and impact of that on price

Explanation / Answer

a.          use equation of exchange to explain how 2 variables mention in the previous quote combine to lead to inflation.

This can be explained by the below equation

m + v = p + y

Where m is the percentage change in money supply, v is the percentage change in velocity of money, p is the percentage change in price level, which is equal to inflation, and y is the percentage change in GDP. Taking velocity as constant, we can rewrite the equation as

m = inflation + y

Inflation = Percentage change in money supply

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