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When the money supply grows, the inflation rate: increases, decreases, increases when the growth of the...

When the money supply grows, the inflation rate: increases, decreases, increases when the growth of the money supply is more than 10%, but stays constant otherwise
When the money supply decrease, the inflation rate: increases, decreases, increases when the growth of the money supply is more than 10%, but stays constant otherwise

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When the money supply grows, the inflation rate increases.This can be explained with the help of quantity theory of money which says that MV=PY where M= money supply , V= velocity of money ,P= price level,Y=output. Assuming Y and V to be constant ,there is a one to one relationship between money supply and price level.So, if money supply grows,price will increase and therefore inflation rate increases.

When the money supply decreases ,inflation rate also decreases. We know MV=PY where M= money supply , V= velocity of money ,P= price level,Y=output. Assuming Y and V to be constant ,there is a one to one relationship between money supply and price level.So, if money supply decreases,inflation rate also decreases.

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