(TIỂU LUẬN) ASSIGNMENT SUBJECT MACROECONOMICS topic inflation and the rationality of the quantity theory of money in vietnam

NATIONAL ECONOMICS UNIVERSITY Faculty of Mathematical Economics ============ ASSIGNMENT SUBJECT : MACROECONOMICS Topic: Inflation and The rationality of The Quantity Theory of Money in Vietnam Full name: Le Bao Trung Student’s ID: 11207312 Class : Actuary 62 Topic: Instructor: Dinh Mai Huong Hanoi, 2021 Contents I Introduction II Theory Money Growth 1.1 Demand for Money 1.2 Supply for Money 1.3 Monetary Equilibrium 1.4 The Quantity Theory of Money Inflation 2.1 Definition and Causes 2.2 Inflation measurement 2.3 Cost of expected inflation 2.3.1 A fall in purchasing power 2.3.2 Shoeleather Costs 2.3.3 Menu Costs 2.3.4 Relative-price variability and misallocation of resources 2.3.5 Inflation-induced tax distortion 2.4 Cost of unexpected inflation: Arbitrary redistributions of wealth III Facts in Vietnam Inflation in Vietnam in the 2016-2020 period 1.1 Inflation rate of Vietnam in the 2016-2019 period 1.2 Inflation rate of Vietnam in 2020 11 Nominal GDP, Money supply and Velocity of Money growth of Vietnam in 2016 – 2020 period 12 2.1 Vietnam’s Nominal GDP growth 12 2.2 Vietnam’s Money supply growth 13 2.3 Vietnam’s Velocity of money growth 14 The rationality of The Quantity Theory of Money in Vietnam 16 Factors affecting inflation in Vietnam in the future 17 4.1 Factors increase inflation pressure 17 4.2 Factors decrease inflation pressure 17 IV Conclusion 18 V References 19 I Introduction Vietnam is considered a country with a stable macroeconomic foundation, which is an important driving force and factor for rapid and sustainable economic development The Economist magazine in August 2020 ranked Vietnam in the top 16 most successful emerging economies in the world According to economic theory, growth, inflation, balance of payments, unemployment are important macroeconomic factors that affect the macroeconomic balance of the economy, in which, the inflation factor is the top concern of any country After the fact that inflation in Vietnam soared to 18.13%, the highest since 2008 in 2011, our country had successful policies to curb inflation and maintain the low inflation rate at below 3,6% in the last years, in the period from 2015 to 2016 In the context that global inflation in 2021 is forecasted to increase quite strongly (maybe at 2.8% compared to 2% in 2020), inflation pressure in Vietnam has also begun to appear In the situation of economic instability because of the epidemic along with a large amount of money being injected into the economy but low capital efficiency, the state needs to take timely actions to control inflation in the future In this assignment, I will provide information about the inflation situation in Vietnam in the past and forecast in the future, and compare the inflation rate with changes in some other factors to evaluate the rationality of The Quantity Theory of Money when applied in Vietnam II Theory Money Growth 1.1 Demand for Money Demand for money (MD) : the demand of money is based on the need for exchange, precaution and speculation Determinants of MD comprise of three factors : M D = f(AE, i, P) - The aggregate expenditure (AE): the sum of all the expenditures undertaken in the economy by the factors during a specific time period The aggregate expenditure determines the total amount that firms and households plan to spend on goods and services at each level of income - Price level (P): the average of current prices across the entire spectrum of goods and services produced in an economy Nominal interest rate (i): the interest rate announced by the bank, it reflects the increase in the amount of money when deposited in the bank Although several factors influence money demand, one stands out as particularly important: the average level of prices in the economy Money is held by people because it serves as a medium of exchange People can use money to acquire the goods and services on their shopping lists, unlike other assets such as bonds or stocks The amount of money they keep for this purpose is determined by the prices of such items and services The higher the prices, the more money is required for a normal transaction, and the more money people opt to keep in their wallets and checking accounts That is, a greater price level (lower money value) raises the amount of money demanded 1.2 Supply for Money The money supply refers to the amount of cash or currency circulating in an economy This factor is under control of monetary policies and independent from the price Measures of money supply: the money supply is categorized by various monetary aggregates including M0, M1, and M2 Coin money, physical paper, and central bank reserves make up the monetary basis, or M0 M1, the most often used aggregate, includes M0 as well as demand deposits and travelers' checks M2, on the other hand, includes M1 as well as savings deposits and money market shares, and may be used as a measure of inflation when compared to GDP The policies the central bank uses to change the money supply in the economy: Open-Market Operation: The activity of a central bank buying or selling government bonds in the market Through short-term trading of valuable papers, the central bank directly affects the available capital of credit institutions, thereby regulating the money supply Central bank buy government bonds if they want to increase money supply and sell bonds if they want to reduce money supply Discount rate: The discount rate is the interest rate charged to commercial banks and other financial institutions for short-term loans they take from the central bank When the central bank raise interest rates banks will deposit less money the money supply will increase Reserve Requirements: a central bank regulation of the cash-to-deposit ratio that commercial banks are required to comply with to ensure liquidity When central bank reduce the reserve requirements, banks will loan more and the money supply will increase Paying Interest on Reserves: when a bank holds reserves on deposit at the central bank, central bank now pays the bank interest on those deposits The less the interest rate on reserves, the less reserves banks will choose to hold and the money supply will increase 1.3 Monetary Equilibrium In the long run, money supply and money demand are brought into equilibrium by the overall level of prices If the price level is above the equilibrium level, people will want to hold more money than the Fed has created, so the price level must fall to balance supply and demand If the price level is below the equilibrium level, people will want to hold less money than the Fed has created, and the price level must rise to balance supply and demand At the equilibrium price level, the quantity of money that people want to hold exactly balances the quantity of money supplied by the Central Bank The two curves in this figure are the supply and demand curves for money The supply curve is vertical because the Fed has fixed the quantity of money available The demand curve for money slopes downward, indicating that when the value of money is low (and the price level is high), people demand a larger quantity of it to buy goods and services At the equilibrium, shown in the figure as point A, the quantity of money demanded balances the quantity of money supplied This equilibrium of money supply and money demand determines the value of money and the price level 1.4 The Quantity Theory of Money P × Y = MS × V - P: Price level (GDP Deflator) Y: The amount of output (real GDP) MS: The quantity of money V: The velocity of money So, P x Y is total value of goods/services (Nominal GDP) and MS x V is total payments needed Changes in price level: %∆P + %∆Y = %∆MS + %∆V Because the velocity of money is relatively stable over time, when the central bank changes the quantity of money (M), it causes proportionate changes in the nominal value of output (P x Y) The economy’s output of goods and services (Y) is primarily determined by factor supplies (labor, physical capital, human capital, and natural resources) and the available production technology In particular, because money is neutral, money does not affect output Therefore, when the central bank increases the money supply rapidly, the result is a high rate of inflation Inflation 2.1 Definition and Causes In economics, inflation is defined as a gradual increase in the price of goods and services in a given economy When the general price level rises, each unit of currency buys less products and services; as a result, inflation equals a loss of money's purchasing power According to The Quantity Theory of Money, inflation is caused by a rise in the quantity of money, which can occur through a variety of causes in the economy The monetary authorities can increase the money supply by printing and giving out more money to individuals, legally devaluing (decreasing the value of) the legal tender currency, or more commonly (and most commonly) by lending new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market 2.2 Inflation measurement The Consumer Price Index (CPI), produced by the Bureau of Labor Statistics (BLS), is the most widely used measure of inflation The primary CPI (CPI-U) is designed to measure price changes faced by urban consumers, who represent 93% of the U.S population It’s an average, though, and doesn’t reflect any particular consumer’s experience The method of calculating CPI in Vietnam has been applied since 1995 up to now in accordance with the guidance of the International Labor Organization (ILO), this is also the standard applied by most countries in the world and is now followed by the International Labor Organization (ILO) The latest ILO Consumer Price Index compilation guide issued in 2020 Therefore, the CPI calculation method of the General Statistics Office closely reflects the consumer price movement in the market and ensures comparability with those of the General Statistics Office data of countries in the world as well as in the region Calculation of inflation rate based on CPI Use the CPI to calculate the inflation rate, which is the percentage change in the price index from the preceding period That is, the inflation rate between two consecutive years is computed as follows: Inflation rate in year = CPI in year 2−CPI in year CPI in year × 100% 2.3 Cost of expected inflation 2.3.1 A fall in purchasing power When the general price level rises, a unit of currency buys fewer goods and services than it used to, so inflation reflects a decrease in purchasing power per unit of currency If your wage stays the same but prices grow due to inflation, your purchasing power will dwindle, and you won't be able to buy as much as you could before 2.3.2 Shoeleather Costs When there is high inflation, the shoe leather cost is the cost of time and effort (or opportunity costs of time and effort) that people waste by holding less currency in order to lower the inflation tax they pay on cash holdings These expenses include making multiple bank trips, not being able to make change, and being unable to make unexpected expenditures The name stems from the fact that going to the bank and getting cash and spending it requires more walking (historically, though the introduction of the Internet has reduced this), thus wearing out shoes more quickly The extra time and convenience that must be sacrificed to keep less money is a substantial cost of lowering money holdings 2.3.3 Menu Costs The expense incurred by a company as a result of adjusting its prices is known as menu cost The term comes from the expense of restaurants printing new menus, but economists apply it to the costs of altering nominal pricing in general Menu expenses, in this larger sense, might involve upgrading computer systems, re-tagging products, and paying consultants to devise new pricing methods, in addition to the actual costs of printing menus More broadly, the menu cost may be thought of as the sum of information, choice, and implementation costs, all of which result in restricted rationality Because of this cost, businesses not always modify their pricing in response to changes in supply and demand, resulting in price stagnation 2.3.4 Relative-price variability and misallocation of resources Consumers compare the quality and costs of various items and services before deciding what to buy They make these judgments to decide how scarce production inputs are distributed among industries and enterprises When relative prices are skewed by inflation, consumer decisions are affected, and markets are less able to allocate resources efficiently Assume that the price of pork rises owing to inflation, and all the producers switch to producing more pork, causing the resources to be misallocated, causing the prices to rise 2.3.5 Inflation-induced tax distortion Almost all taxes distort incentives, affect people's behavior, and result in a less effective allocation of resources in the economy Many taxes, on the other hand, become considerably more burdensome when inflation is present The reason for this is that while creating tax legislation, legislators frequently neglect to account for inflation According to economists who have researched the tax code, inflation tends to increase the tax burden on saved income 2.3.6 Confusion and inconvenience It's impossible to estimate the price of inflation's uncertainty and inconvenient consequences We previously addressed how the tax law miscalculates actual incomes in the face of inflation Similarly, as prices rise over time, accountants miscalculate a company's earnings Because inflation causes the real worth of dollars to change over time, calculating a firm's profit—the gap between its income and costs—is more difficult in an inflationary environment 2.4 Cost of unexpected inflation: Arbitrary redistributions of wealth Unexpected inflation arbitrarily redistributes wealth from one group to another group, such as from borrowers to lenders When people decide to borrow money or lend money, they often consider what they think the rate of inflation will beWhen inflation differs from expectations, some groups may benefit, while others may suffer When inflation exceeds expectations, lenders may suffer a loss, while borrowers may benefit Lenders win when inflation is lower than projected, while borrowers suffer III Facts in Vietnam Inflation in Vietnam in the 2016-2020 period Inflation rate of Vietnam in the 2016 - 2020 period (%) 3.53 3.54 3.5 3.23 2.79 2.66 2.5 1.5 0.5 2016 2017 2018 2019 2020 There have been times when Vietnam's economy has been ravaged by high and persistent inflation, resulting in a catastrophic economic catastrophe (especially in the late 70s to early 90s) Inflation in Vietnam, on the other hand, has been steadily declining in recent years and has remained at a modest level The inflation rate in Vietnam has consistently been stable at below 4% and changed very little between 2016 and 2020, thanks to a harmonious balance of fiscal and monetary policies When it comes to inflation, Vietnam's rate is closely linked to the CPI, GDP growth rate, price changes within industries, and other factors that contribute to the macro-stability economy's and firmness The State Bank stated that it will maintain a careful and flexible monetary policy in the future, closely working with other macro measures in order to keep average inflation around 4%, as requested by the National Assembly 1.1 Inflation rate of Vietnam in the 2016-2019 period In 2016, CPI in December increased by 4.74% compared to December 2015, an average increase of 0.4% per month The average CPI in 2016 increased by 2.66% compared to the average of 2015 The increase in CPI in December 2016 compared to the same period in 2015 and the average increase in CPI in 2016 compared to the average in 2015 increased higher than the previous year but much lower than the average CPI increase of some recent years, and still within the target limit of 5% set by the National Assembly Core inflation in December 2016 increased by 0.11% over the previous month and by 1.87% over the same period last year Average core inflation in 2016 increased by 1.83% compared to 2015 In 2017, consumer price index (CPI) in December increased by 0.21% over the previous month; Average CPI in 2017 increased by 3.53% compared to 2016, below the target set by the National Assembly; CPI in December 2017 increased by 2.6% compared to December 2016, an average increase of 0.21% per month Core inflation in December 2017 increased by 0.11% over the previous month and by 1.29% over the same period last year Average core inflation in 2017 increased by 1.41% compared to 2016 In 2018, the consumer price index (CPI) in December decreased by 0.25% compared to the previous month Average CPI in 2018 increased by 3.54% compared to 2017, below the target set by the National Assembly CPI in December 2018 increased by 2.98% compared to December 2017, an average increase of 0.25% per month Core inflation in December 2018 increased by 0.09% over the previous month and by 1.7% over the same period last year Average core inflation in 2018 increased by 1.48% compared to 2017 In 2019, the consumer price index (CPI) in December increased by 1.4% compared to the previous month, this is the highest increase in the past years, in which the group of food and food services increased by 3.42% due to the epidemic African swine fever causes a decrease in the supply of pork, and an increase in the price of products processed from pork, replacing pork The average CPI in 2019 increased by 2.79% compared to the average in 2018, below the target set by the National Assembly, this is also the lowest average annual increase in the past years 1.2 Inflation rate of Vietnam in 2020 10 Average CPI Growth Rate in 2020 (%) 6.43 5.91 5.56 4.9 4.39 4.19 4.07 3.96 3.85 3.71 3.51 3.23 1 month 10 11 12 months months months months months months months months months months months In 2020, the price level this year increased quite high compared to the same period last year, right from January, it increased by 6.43%, affecting the management and administration of prices in 2020, leading to controlling inflation Development under the target of less than 4% set by the National Assembly faces many difficulties and challenges However, with the close direction and management of the Government, the Prime Minister, the coordination of ministries, branches and localities, the increase of CPI was gradually controlled month by month with a decreasing trend The average consumer price index in 2020 increased by 3.23% over the previous year, reaching the target of controlling inflation, keeping the average CPI in 2020 below 4% set by the National Assembly in the context of a year with many unpredictable fluctuations The average CPI in 2020 increased due to the following main reasons: - - The price of food items increased by 4.51% over the previous year (making the overall CPI increase by 0.17%), of which the price of rice increased by ,14% due to the increase in export price of rice and domestic consumption demand Prices of food items increased by 12.28% over the previous year (making CPI increase by 2.61%), of which the price of pork increased by 57.23% due to uncertain supply (caused CPI to increase by 2.61%) increased by 1.94%), accordingly, the price of processed meat increased by 21.59%, pork fat increased by 58.99%, besides, due to the influence of storms and floods in the central provinces in October and in November, the impact caused the area of vegetables to be flooded heavily, many ponds, lakes, barns were damaged, 11 - - swept away, etc., causing the prices of fresh, dried and processed vegetables to increase The price of drugs and medical equipment increased by 1.35% due to the complicated situation of the Covid-19 epidemic in the world, so the demand for this product is high Continuing to implement the roadmap to increase tuition fees according to Decree No 86/2015/ND-CP, making the price index of educational services in 2020 increase by 4.32% compared to 2019 Besides, there are a number of factors contributing to restraining CPI growth rate in 2020: - - - - Prices of essential commodities such as gasoline and oil decreased by 23.03% over the previous year (making the overall CPI decrease by 0.83% ); kerosene price decreased by 31.21%; domestic gas prices decreased by 0.95% due to the influence of world fuel prices People's demand for travel and tourism decreased due to the impact of the Covid-19 epidemic, causing the price of the package tour group to decrease by 6.24% compared to the previous year; transportation costs of vehicles such as trains and planes decreased The Government has implemented support packages for people and producers facing difficulties due to the Covid-19 epidemic such as the support package of the Electricity of Vietnam (EVN) to reduce electricity prices and electricity bills for customers electricity prices in May and June this year decreased by 0.28% and 2.72% respectively compared to the previous month All levels and sectors have actively implemented many synchronous solutions to prevent complicated developments of the Covid-19 epidemic, ensure the balance of supply and demand and stabilize the market Nominal GDP, Money supply and Velocity of Money growth of Vietnam in 2016 – 2020 period 2.1 Vietnam’s Nominal GDP growth 12 Vietnam's GDP growth in 2016 - 2020 period (%) 6.81 7.08 7.02 6.21 2.91 2016 2017 2018 2019 2020 GDP growth rate in the period 2016 - 2019 is quite high, averaging 6.8% Although the economy is heavily affected by the Covid-19 epidemic in 2020, the average growth rate for the five years 2016 - 2020 is estimated at about 5.9%1 and is among the fastest growing countries in the region and the world In which, the industry, construction and service sectors continue to play a leading role, contributing mainly to the overall growth, with an average growth rate of 7.3% in the period 2016 - 2020 respectively 6%; the share of industry and services (including construction) at basic prices in GDP increases from 73% in 2015 to about 75.4% in 2020 GDP scale continues to expand, by 2020 estimated at 268.4 billion USD, an increase of about 1.4 times compared to 2015; GDP per capita in 2020 is estimated at about 2,750 USD/person, about 1.3 times higher than 2015 In view of the achievements achieved along with the policies to be implemented in the coming time, the government has set a target The average GDP growth target for the next years is about 6.5-7% 2.2 Vietnam’s Money supply growth 13 Vietnam's Money supply growth 2016-2020 (%) 20 18.38 18 14.97 16 13.26 14 11.34 12 12.1 10 2016 2017 2018 2019 2020 In the period from 2016 to 2020, monetary policy tools are operated proactively, flexibly, and coordinated in monetary control; Monetary policy closely coordinates with other macro policies to regulate liquidity, adjust the price levels managed by the State in order to achieve the set inflation target The results show that the total means of payment (M2) in this period is reasonably controlled Money supply in this period is always stable and does not fluctuate much over the years compared to the period from 2010 to 2014, as well as the increase in the M2 money supply is also much lower than that of the 2001-2010 period Money supply growth was at nearly 20% in 2016 and then gradually decreased and reached 11.34% in 2018 then increased slightly again at around 1% 2.3 Vietnam’s Velocity of money grow th 14 Velocity of money in Vietnam in 2016 - 2020 period 0.8 0.69 0.65 0.7 0.64 0.61 0.6 0.55 0.5 0.4 0.3 0.2 0.1 2016 2017 2018 2019 2020 Vietnam's velocity of money in recent years has tended to decrease and become more stable from 2003 to present Monetary velocity has decreased from 4.97 (1992), to 1.67 (2003), 1.54 (2004) and 1.35 (2005) In the period from 2016 to 2020, the cash flow also continuously decreased but was relatively stable In the context of a re-emergence of the Covid-19 pandemic, the domestic consumption of goods and services will increase (ie, the total retail sales of consumer goods and services will decrease by 4.7 percent) %, if excluding the price factor, the drop is even deeper than 6.2% like in the past months On the other hand, money will not run into the market of goods and services directly serving investment, production, business or consumption, but will be "buried" in gold, real estate, virtual currency, securities, etc both causing "bubbles" in these markets and causing risks to put pressure back on the goods and service markets when these "bubbles" burst In general, declining and low velocity of money will slow down economic growth An increase in money supply puts pressure on the prices of goods and services However, with a stable monetary velocity, it shows the effectiveness of the State Bank's monetary policy management in recent years In developed countries, the velocity of money is approximately 1, showing that the velocity of money in Vietnam is gradually matching the international trend, reflecting the market nature of the economy Change of velocity of money over the years: Year % change 2017 -5.798% 2018 -1.538% 2019 -4.688% 2020 -9.836% 15 The rationality of The Quantity Theory of Money in Vietnam When implementing the formula as a percentage, the quantity theory of money takes the following form: %∆P + %∆Y = %∆MS + %∆V Or: %∆ Nominal GDP = %∆MS + %∆V In the following, based on actual data in Vietnam, I will calculate and evaluate the reasonableness of the above equation % Change / Year 2017 2018 2019 Nominal GDP 6.81% 7.08% 7.02% Money supply 14.97% 11.34% 12.1% Velocity of money -5.798% -1.538% -4.688% Right hand side 9.172% 9.802% 7.412% The difference between the two sides of the equation: 2017 2.362% 2018 2.722% 2019 0.392% 2020 2.91% 13.26% -9.836% 3.424% 2020 0.514% The % change between the right and left sides is different by 2% in 2017 and 2018 and only less than 1% in 2019 and 2020 In addition, during the calculation of the indexes, the figures subject to a certain error as well as my own error in rounding, I can confirm that the above difference is small enough to be able to conclude: “The change of money supply and velocity of money is almost equivalent to the change of our country's nominal GDP and The Quantity Theory of Money is reasonable and has high accuracy to the actual data in Vietnam." Through the calculation and comparison, we can get knowledge of the important reason that the money supply in our country is always at double digits but inflation is kept at a low level, that is because the velocity of money is very low and tends to decrease If the velocity of money is greater than (or higher), the money supply (M2) increases more than the quantity of goods and services (Q), then the price (P) will increase, causing high inflation - as shown above occurred during the period of galloping inflation from 1992 and earlier, or happened in the period 2004 - 2011 If the velocity of money is too low and decreases as it is now, it will have a negative impact On the one hand, resonance with other factors will make the quantity of goods and services (Q- ie GDP at constant prices) increase low, if the money supply (M2) does not 16 increase If the velocity of money is low, it proves that a lot of money is trapped in investment channels and the public financial system, but not in the production and consumption sectors On the other hand, if the money supply (M2) is increased, the price (P) will increase, without causing the quantity of goods and services to increase In general, declining and low turnover will slow down economic growth An increase in money supply puts pressure on the prices of goods and services, Factors affecting inflation in Vietnam in the future 4.1 Factors increase inflation pressure Commodity prices soar: Due to the prolonged Covid-19 epidemic this year, production has been halted, supply chains are broken as well as social distancing, causing prices of food, foodstuffs, consumer goods and some other goods increase The increase in world commodity prices from the beginning of 2021 to now is somewhat similar to the time in 2008 because of the expectation of a strong economic recovery after the crisis and the strong loosening of fiscal and monetary policies, which worries us on high inflation This year, oil prices increased by about 25-30% year-on-year, raw material prices increased, many real estate “price fever” and food prices such as rice for export increased by 10% due to high logistics costs The money supply increases moderately, but if capital efficiency is low, it will create long-term pressure on inflation: In the context that the size of the money supply (M2) compared to GDP of Vietnam compared to other countries in the world is relatively large (at 138% of GDP, higher than the average in the ASEAN region), Vietnam's credit scale at the end of 2019 is equivalent to 138% of GDP (compared to the ASEAN-9 average of 86% of GDP, according to the WB) Meanwhile, Vietnam ICOR coefficient for the period 20162020 is at 6.13 times, much higher than the region and World Bank standards for developing countries (ICOR is only 3-4 times) The velocity of money slows down, but the "path" of money is more complicated: The velocity of money slows down in the real economy, but "cheap money" has the opportunity to flow into real estate, securities, digital currency and become one of the causes of fever and hot growth of businesses this market in the past This is also a common phenomenon of many countries around the world, the velocity of money is slowing down in the real economy, but money is being circulated quite quickly in risky investment channels 4.2 Factors decrease inflation pressure Macro foundation, stable basic exchange rate: Up to now, Vietnam's major balances (public debt, budget deficit, trade balance ) are in better condition than in the 17 previous period In the past, plus the momentum of controlling inflation below 4% in the past years, the supply and demand for foreign currency is quite stable, the gold market is better controlled Velocity of money is slow and downward trend as analyzed above Policy coordination, especially between monetary policy, fiscal policy and price is getting more and more effective The 4th Conference of the Central Committee, term XIII, discussed and made many decisions, including the policy of studying and operating fiscal and monetary policies in a flexible, efficient, coordinated and adjusted manner This policy with a reasonable dose, at the right time, creates resources to ensure macroeconomic stability, major balances of the economy, recovery of production and business, circulation of goods and labor activities, promoting exports and domestic consumption, promoting investment including both public and private investment The structure of the basket of goods for calculating CPI is increasingly approaching the international level (the trend of reducing the proportion of food and food staples) helps the long-term inflation level to be more stable and there is almost no sudden price shock For example, the situation of high pork prices has been controlled, some short price spikes at one of the times when the Covid-19 epidemic broke out, but they have been and will be controlled in time IV Conclusion Inflation is a monetary phenomenon, but the decisive cause is different between countries in each stage of development If inflation is low, then this is a beneficial effect for the economy, but if inflation is high, it will seriously affect all aspects of economic, political and social life of the country a country In Vietnam, the inflation rate in recent years has been controlled at a low level, below 4% in the 2016-2020 period, making an important contribution to stabilizing the macroeconomy By calculating based on actual data, I can conclude that The Quantity Theory of Money makes sense and accurately reflects the actual data in Vietnam However, Vietnam government should promote the velocity of money to grow the economy without a large increase in the money supply The velocity of money is related to the frequency of monetary transactions in the economy, if the monetary velocity is faster then money is changing hands to trade goods faster, this will stimulate the growth of the economy Although Vietnam provides a lot of money to the economy but the money cycle slows down, the supply chain is broken, the supply of goods slows down, people spend frugally due to the COVID-19 epidemic, so inflation in 2021 is forecasted to remain low and can be maintained at less than 4% as the target set by the National Assembly 18 V References N.Gregory Mankiw (2016), Principles of Economics (8th ed.) General Statistics Office of Vietnam, Vietnam Statistical Yearbook Phương Dung (2021), Tăng vòng quay tiền tệ, giảm cung tiền để thúc đẩy tăng trưởng Retrieved November 20, 2021 from: https://thoibaotaichinhvietnam.vn/tang-vong-quaytien-te-giam-cung-tien-de-thuc-day-tang-truong-92526.html Quách Doanh Nghiệp (2021), Kích thích kinh tế, gia tăng vận tốc dịng tiền Retrieved November 21, 2021 from: https://www.saigondautu.com.vn/kinh-te/kich-thich-kinh-tegia-tang-van-toc-dong-tien-90400.html Tô Hà (2021), Lạm phát khơng q đáng lo, bong bóng tài sản kiểm soát Retrieved November 22, 2021 from: https://nhandan.vn/nhan-dinh/lam-phat-khong-qua-lo-bongbong-tai-san-duoc-kiem-soat-651835 Bùi Quang Tuấn, Phạm Anh Tuấn (2021), Kinh tế Việt Nam quý II triển vọng năm 2021 Retrieved November 22, 2021 from: https://vietnamfinance.vn/kinh-te-viet-namquy-ii-va-trien-vong-ca-nam-2021-20180504224254669.html Some reports on socio-economic situation on the website of the General Statistics Office of Vietnam (www.gso.gov.vn) Macroeconomic data on the website of Vietstock (https://finance.vietstock.vn) 19 ... future, and compare the inflation rate with changes in some other factors to evaluate the rationality of The Quantity Theory of Money when applied in Vietnam II Theory Money Growth 1.1 Demand for Money. .. money demanded balances the quantity of money supplied This equilibrium of money supply and money demand determines the value of money and the price level 1.4 The Quantity Theory of Money P ×... 2.2 Vietnam? ??s Money supply growth 13 2.3 Vietnam? ??s Velocity of money growth 14 The rationality of The Quantity Theory of Money in Vietnam 16 Factors affecting inflation in