Asked by Abdullah Nasir on Jul 03, 2024
Verified
A rising rate of inflation:
A) makes people more willing to hold money as an asset.
B) reduces the usefulness of money as a store of value and thus increases the velocity of money.
C) increases the usefulness of money as a medium of exchange and thus reduces the velocity of money.
D) is usually preceded by a reduction in the money supply.
E) does not have any effect on the velocity of money.
Inflation Rate
The percentage increase in the general price level of goods and services in an economy over a period of time.
Velocity of Money
The rate at which money circulates in the economy, calculated as the ratio of nominal GDP to the money supply, indicating the efficiency with which money is used to facilitate transactions.
Store of Value
An asset that can be saved, retrieved, and exchanged in the future without losing value.
- Clarify the association between the rapidity with which money changes hands, the rise in general price levels, and the adoption of financial substitutes.
- Highlight the aspects that influence the quickness of money turnover and its effect on economic stability.
Verified Answer
AA
Aileen AizenshtatJul 09, 2024
Final Answer :
B
Explanation :
When the rate of inflation rises, the purchasing power of money decreases, which reduces the usefulness of money as a store of value. As a result, people are more likely to spend money quickly, which increases the velocity of money.
Learning Objectives
- Clarify the association between the rapidity with which money changes hands, the rise in general price levels, and the adoption of financial substitutes.
- Highlight the aspects that influence the quickness of money turnover and its effect on economic stability.