Question

Explain a substantial increase in the price level when neither the money supply nor the velocity of money has increased. How can this occur?

Answer 1

A substantial increase in the price level can be witnessed in a certain economy without having a relative increment in the money supply or velocity. This is mainly due to the fact that the cost of factors of production or different types of inputs used in the production process such as land, labor, capital, and technology might have increased over time.

In order to ensure that these organizations have some sort of profits, the prices of the products are increased by the producing organizations and thus the inflation rises.

This can also result due to the shock in the economy which results in the increased price level without resulting the increase in the money supply and velocity.

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