If during a particular year, the money supply grows 6%, output grows 4%, and velocity grows 2%, the inflation rate will be
A)0%.
B)4%.
C)8%.
D)12%.

Question

Quizplus · Accepted Answer

The quantity equation is MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is output. Solving for P, we get P = MV/Y. 
Substituting the given values, 
P = (1.06 * 1.02) / 1.04 = 1.039 or 3.9%
Therefore, the inflation rate is approximately 4%. Answer choice B is correct.

If During a Particular Year, the Money Supply Grows 6