Consider two countries, Country A and Country B. In Country A, people are very confident and comfortable using electronic payments and keeping most of their money in the bank. In Country B, however, many people choose to hold real cash balances because of a mistrust in the banking system. Over this period, there are no other differences between the two countries. If the rate of money growth and the growth rate of real GDP were the same in Country A and Country B over this period, then how would the rate of inflation differ between the two countries? Carefully explain your answer.

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If the rate of money growth and the growth rate of real GDP are the same in both Country A and Count... View the full answer