What is the relationship between money supply growth and inflation?

The relationship between money supply growth and inflation is central to understanding monetary economics. When the growth rate of the money supply surpasses the growth rate of economic output, it can lead to inflation. This outcome is primarily rooted in the concept that if more money is circulating in the economy without a corresponding increase in goods and services, the excess money can drive prices up.

As people and businesses have more money, their purchasing power increases, leading to higher demand for goods and services. If the supply of those goods and services cannot keep up with the increased demand, prices will rise, resulting in inflation. Thus, option B accurately captures the potential link between money supply growth and increases in price levels.

Options that suggest a lack of relationship or an absolute correlation, such as claiming that economic output always matches money supply growth or that only decreases in money supply lead to inflation, do not reflect the complexities of economic dynamics in real-world scenarios. Therefore, the answer emphasizing the imbalance between money supply growth and economic output as a precursor to inflation is the most accurate representation of this economic principle.