In economies with persistently high inflation, an increase in the money supply tends to cause the price level to:

• A. Translate into a proportional increase in the aggregate price level much faster than in economies with lower inflation
• B. Not affect the price level
• C. Translate into a proportional increase in the aggregate price level only in the long run
• D. Translate into a proportional increase in output

Answer: (A)

In economies with persistently high inflation, the price level responds quickly to changes in the money supply because inflation expectations are unanchored and prices and wages adjust upward readily. When the money stock grows, nominal spending tends to rise, and if output is near capacity, firms pass the higher demand into higher prices rather than expanding real output. In this environment, the price level moves in proportion to the money supply change, and the adjustment happens more rapidly than in economies with lower inflation.

So the money expansion translates into a proportional rise in the price level, and the speed of that adjustment is faster in high-inflation contexts. The other possibilities underestimate the immediate impact on prices, imply no short-run effect, or mismatch money growth with real output.