Question

n article in the Economist notes that the government of Venezuela running a large budget deficit? "caused the money supply almost to quadruple in two years and led to the? world's highest inflation? rate, of over? 60% a? year." ?Source:? "Of Oil and Coconut? Water," Economist?, September? 20, 2014. Running a large budget deficit would cause the money supply in Venezuela to increase so rapidly because A. the government must have sold bonds to investors to finance the deficit. B. the government was spending more than it received in revenue. C. the government was both borrowing and lending. D. the government must have sold bonds to the central bank to finance the deficit. If the money supply increased by 150 percent per year while the annual inflation rate was 60? percent, velocity in Venezuela during this period must have A. changed in an indeterminate way. B. declined significantly. C. increased significantly. D. remained constant.

Answer 1

Question 1

The government of Venezuela was running a large budget deficit and at the same time money supply was also increasing at fast pace.

The reason behind this could be that Venezuelan government would have been issuing bonds to central government to finance the deficit and central bank is printing money to pay for the bonds purchased from the government leading to increase in money supply.

Hence, the correct answer is the option (D).

Question 2

According to the Quantity Theory of Money,

Growth rate of money supply + Growth rate of Velocity = Inflation rate + Growth rate of real Output

The money supply has increased by 150 percent and annual inflation rate has increased by 60 percent. However, growth rate of real output is not provided.

So, it is difficult to specifically state the change in velocity.

Hence, the correct answer is the option (A).