Set 14: Inferences (Intermediate)
Explanation
PASSAGE
In standard economic theory, increasing the money supply typically leads to inflation if the output of goods and services remains constant. However, in Country X, the central bank recently doubled the money supply, yet inflation remained near zero. Economists observing this phenomenon suggest that the velocity of money—the rate at which money changes hands—must have
Which choice most logically completes the text?
Detailed Explanation
**Choice A is the best answer. ** The equation of exchange states likely MV = PY. If M (Money Supply) goes up, and P (Price/Inflation) stays flat, and Y (Output) is constant, then V (Velocity) *must* go down. Logically, if there is more money but prices don't rise, it means people aren't spending the extra money; they are hoarding it. Thus, velocity decreased. Choice B (increased velocity) would cause *hyperinflation* (M up + V up = P huge up). Choice C explains nothing. Choice D refers to output, which is assumed constant.
Key Evidence:
• "doubled the money supply"
• "inflation remained near zero"
Why others are wrong: B (Would cause high inflation), C (Does not explain the lack of inflation), D (Irrelevant).
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