How does money velocity contribute to the observation that in countries with high rates of inflation the inflation rate exceeds the rate of money growth?
What will be an ideal response?
Inflation contributes to high velocity in the sense that inflation increases the opportunity cost of holding money. When inflation is extremely high, say 1,000 percent, the opportunity cost of holding money is equivalent to the rate of inflation, or in this case -1,000%. At this high of a rate money loses value quickly so people will want to exchange it for durable goods (which do not lose value with inflation) as quickly as possible. This will cause the velocity of money to rise rapidly. The quantity theory of money reveals that given a real income, the percentage change in the price level (inflation) will equal the percentage change in money growth plus the percentage change in velocity. So the rate of inflation exceeds the growth rate of money.
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