Question

Arkensland is a highly industrialized country. Prices have been steadily increasing over the last few years and inflation reached an all-time high of 8 percent last year. Following this, the central bank came under pressure to reduce inflation to at least 4 percent in this year. With real GDP expected to grow at 2 percent this year, the finance minister suggested that the central bank should ensure that money supply growth in the current year is not more than 6 percent. However, inflation at the end of this year turned out to be higher than 4 percent, even though real GDP grew at 2 percent and money supply growth was restricted to 6 percent. Which of the following can most reasonably be inferred from the above information?

A. There is a risk of hyperinflation in Arkensland.B. The growth of GDP in Arkensland has stagnated. C. Even though the inflation target was not met, the overall price level did decline this year as compared to last year. D. The velocity of money increased this year.E. The central bank of Arkensland must have sold bonds this year in order to reduce the money supply.

Answer 1

D. The velocity of money increased this year.

Step-by-step explanation:

As for the details provided, we know that the actual inflation is increasing rapidly, also the real income increased but not with the same level.

And still after so many measures initiated by the central bank the inflation has been increasing. This provides for the speed of increase in the value of money.

As with the increasing inflation that too after so many measures the velocity has been increasing of value of money which makes it more valuable.

Basically the power to buy decreases with the same amount of money.