Suppose that we produce a graph with the annual inflation rate on the y-axis and the growth rate of the money supply minus the growth rate of real GDP on the x-axis.We plot the averages of each of these quantities over the past 50 years on the graph.If the countries' points all lie approximately on the 45° line,then this lends support to the ________.
A) quantity theory of money being correct
B) quantity theory of money being incorrect
C) social cost of inflation outweighing the social benefit of inflation
D) social benefit of inflation outweighing the social cost of inflation

Question

Quizplus · Accepted Answer

The 45° line represents the equality between the growth rate of the money supply minus the growth rate of real GDP and the inflation rate. If the countries' points lie approximately on this line, then it suggests that changes in the money supply have a direct impact on inflation, supporting the quantity theory of money. This theory posits that the level of inflation is directly proportional to the growth rate of the money supply in the long run, assuming that other factors such as real GDP remain constant. Therefore, the correct answer is A) quantity theory of money being correct.

Suppose That We Produce a Graph with the Annual Inflation