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Relationship between money growth and inflation

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Between 1984-1985, the U.S. money supply increased to $641.0 billion from $570.3 billion, while that of Brazil increased to $106.1 billion cruzados from 24.4 billion. At the same time, the U.S. CPI rose to 100 from 96.6, while the Brazilian price index rose to 100 from 31.

a) Calculate money supply growth (%?Ms), inflation rates (%?CPI), and growth in real money balances (%?Ms/P) for the U.S. and Brazil. [The growth rate of a fraction x/y can be approximated as %?x - %?y.]

b) How do these number match up with the predicted relationship between money growth and inflation in the long-run?

c) Why do you think they matched up with the predicted relationship a bit better in one country than the other?

Reference no: EM131260188

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