Sure, let's tackle the first question:
Question: According to the quantity theory of money, how much will inflation rise if the government increases the money supply by eight percent?
Solution:
The quantity theory of money can be summarized by the equation [tex]\( MV = PY \)[/tex], where:
- [tex]\( M \)[/tex] is the money supply
- [tex]\( V \)[/tex] is the velocity of money (the rate at which money changes hands)
- [tex]\( P \)[/tex] is the price level
- [tex]\( Y \)[/tex] is the output of the economy (real GDP)
Under the assumption that the velocity of money, [tex]\( V \)[/tex], and the output, [tex]\( Y \)[/tex], remain constant, an increase in the money supply, [tex]\( M \)[/tex], will result in a proportional increase in the price level, [tex]\( P \)[/tex] (inflation).
Given:
- The money supply increases by 8%.
Therefore:
- Inflation will rise by 8%.
So, the expected rise in inflation is 8%.
Answer: Inflation will rise by 8%.
---
Now, let's move on to the second question:
Question: What does debt convert into during inflation?
Explanation:
During periods of inflation, the value of money decreases because prices for goods and services rise. This means that the real value, or purchasing power, of money diminishes.
For debt, this has the following implication: The nominal amount of debt (the amount originally borrowed) remains the same, but the real value of that debt decreases. This benefits borrowers because they repay their loans with money that is worth less than when they borrowed it.
Answer: During inflation, the real value of debt decreases.
