Suppose that an economy is experiencing an annual growth of real GDP of 5 percent,and the velocity of money is constant.In order to maintain price level stability what needs to occur?

Question

Quizplus · Accepted Answer

In order to maintain price level stability, the increase in real GDP must be matched by an increase in the money supply. This can be achieved by increasing the money supply by 5%, which will keep pace with the 5% increase in real GDP and maintain price level stability. Option A is incorrect as it suggests a contractionary fiscal policy, which will dampen economic growth, leading to undesirable outcomes. Option B is incorrect as it suggests a budget deficit, which can put pressure on interest rates and potentially lead to inflation. Option D is incorrect as increasing the money supply by more than 5% may lead to inflationary pressures. Option E is also incorrect as a decrease in the money supply will lead to deflationary pressure, which can hurt economic growth.

Suppose That an Economy Is Experiencing an Annual Growth of Real