Assume nominal money supply grows by 6% and real GDP grows by 4%.We can conclude that the rate of inflation is about

Question

Quizplus · Accepted Answer

The rate of inflation can be approximated by the difference between the nominal money supply growth rate and the real GDP growth rate, adjusted for the change in velocity of money. Since the nominal money supply grows by 6% and real GDP grows by 4%, the base difference is 2%. The correct answer must account for the change in velocity, making option E, "+2% plus the percentage change in velocity," the correct choice. This is because the actual inflation rate can be higher or lower depending on whether the velocity of money is increasing or decreasing, respectively.

Assume Nominal Money Supply Grows by 6% and Real GDP