According to standard macroeconomic theory, an increase in the growth rate of the nominal money supply in an economy will generally lead to which of the following outcomes in the long run?

Introduction / Context:
This question examines your understanding of the relationship between money supply and inflation in macroeconomics. Many monetary theories, including the quantity theory of money, suggest that changes in the growth rate of the nominal money supply have important long run effects on the price level. Recognising the typical direction of this effect is vital for interpreting monetary policy and inflation outcomes in an economy.

Given Data / Assumptions:

• The focus is on the growth rate of nominal money supply, not on a one time change.
• We are considering long run effects rather than short run fluctuations.
• The options include lower inflation, higher inflation, lower interest rates, and currency appreciation.
• We assume that real output and velocity are relatively stable in the long run, as in the quantity theory framework.

Concept / Approach:
According to the quantity theory of money and many modern macro models, in the long run, inflation is primarily a monetary phenomenon. If the central bank increases the growth rate of the nominal money supply persistently, and real output grows at a lower rate, the excess growth of money will eventually be reflected in higher growth of the price level, that is, a higher rate of inflation. Short run interest rates and exchange rates may respond in complex ways, but in the long run, the main predictable outcome of higher money growth is higher inflation, not permanently lower interest rates or automatic currency appreciation.

Step-by-Step Solution:
Step 1: Recall the basic quantity equation in growth rate form: growth of money supply plus growth of velocity equals inflation plus growth of real output.Step 2: In the long run, if velocity is roughly stable and real output growth is determined by real factors, an increase in money growth must lead mainly to an increase in inflation.Step 3: Therefore, a higher growth rate of nominal money supply is associated with a higher long run rate of inflation.Step 4: Lower inflation would require slower money growth, not faster, so option suggesting lower inflation is inconsistent.Step 5: While an expansion in money supply can reduce interest rates in the short run, in the long run, nominal interest rates tend to incorporate expected inflation, so they may even rise with higher inflation.Step 6: Currency appreciation is more likely with tight monetary policy; loose money growth often leads to depreciation rather than appreciation.

Verification / Alternative check:
Empirical studies across many countries show a strong long run correlation between money growth and inflation. Cross country comparisons over long periods indicate that economies with sustained high money supply growth usually experience sustained high inflation, while those with low money growth have low inflation. This evidence supports the theoretical argument that increasing the nominal money growth rate pushes up inflation in the long run. Although short run dynamics can be noisy, the long run pattern is robust and underpins many central bank strategies that target inflation by controlling money growth or interest rates.

Why Other Options Are Wrong:
Lower rate of inflation: This would result from tighter monetary policy or slower money growth, not from increasing the money growth rate.

Lower interest rates: Monetary expansion may temporarily lower interest rates, but in the long run, higher inflation expectations can raise nominal interest rates, so this is not the main long run effect.

Currency appreciation: Persistent high money growth is more likely to weaken the domestic currency relative to foreign currencies rather than strengthen it.

Common Pitfalls:
Some learners focus only on short run effects, recalling that an increase in money supply can lower interest rates and stimulate the economy, and hence they mistakenly choose lower interest rates or lower inflation. It is important to note the phrase in the long run in such questions. Over long horizons, real variables are determined by technology and resources, and nominal variables like inflation adjust to monetary policy. Keeping this distinction clear helps in choosing higher inflation as the correct long run outcome of faster money growth.

Final Answer:
An increase in the growth rate of the nominal money supply generally leads to a higher rate of inflation in the long run.