If the central bank follows a rules-based approach to monetary policy and the velocity of money turns out to be larger than expected, then inflation:
A) will be lower than expected.
B) will be higher than expected.
C) will be unaffected.
D) could be higher or lower than expected.

Question

Quizplus · Accepted Answer

If the velocity of money is larger than expected, it means that each unit of currency is being used more frequently to purchase goods and services within a given time period. This increased velocity can lead to higher demand for goods and services, which, if not matched by an increase in supply, can lead to higher prices or inflation. Therefore, under a rules-based approach to monetary policy, if the central bank does not adjust for the unexpected increase in the velocity of money, inflation will likely be higher than expected.

If the Central Bank Follows a Rules-Based Approach to Monetary