According to the quantity theory of money, explain what is the primary determinant of the long-run inflation rate?
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The so-called quantity theory of money suggests that the amount of money in circulation is the primary determinant of the price level in the economy and that the growth rate of the money supply is the primary determinant of the inflation rate. Write a short essay evaluating the logic of these arguments.
Money stock is the key determinant of long-run inflation and, therefore, should be of primary concern to central banks.
Discuss this statement with reference to the ECB's and US Federal Reserve's approach to analyzing money supply data.