"Inflation increases the average level of prices". Which of the following is(are) necessarily implied by this statement:
(i) The prices of commodities exceed income
(ii) Money supply grows at a higher rate than the real GDP
Tap an option to check your answer.
Answer: (B)
This question tests the standard quantity theory of money framework used in macroeconomics, where sustained inflation is conventionally understood as implying that money supply is growing faster than real output.
(i) 'The prices of commodities exceed income' does not follow from the statement — prices and income are not directly comparable quantities in this way. Not implied.
(ii) 'Money supply grows at a higher rate than the real GDP' — within the standard quantity-theory framework (, or in growth rates ), a sustained rise in the average price level is conventionally interpreted as implying money supply growth outpacing real GDP growth (holding velocity roughly constant, the standard classroom assumption). This is the intended inference the question is testing. Implied, within this standard economic framework.
Therefore the answer is (B): Only (ii).
Option (D) tempts if "necessarily implied" is read as strict logic, but in the quantity-theory framework the question assumes, a sustained rise in average prices means money growing faster than real output. Statement (i) confuses the price level with income, so only (ii) holds.
Inflation, unemployment and the Phillips curve has come up 106 times in 7 exams since 2006.
This question is on Causes and types of inflation, part of Inflation, unemployment and the Phillips curve in Macroeconomics.
What drives inflation: demand, costs, structure and money creation.
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Question from the GATE 2021 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.