Assuming a long-run relationship, if nominal money supply grows at a rate of 5%, real output growth is 3%, and the inflation rate is 2%, what is the percentage change in velocity?
A)5%
B)2%
C)1%
D)0%
E)-1%

Question

Quizplus · Accepted Answer

According to the quantity theory of money in the long run, the percentage change in velocity is equal to the difference between the percentage change in nominal money supply and the percentage change in prices (inflation rate) minus the percentage change in real output. Therefore, the percentage change in velocity is:

% Change in Velocity = % Change in Nominal Money Supply - Inflation Rate - % Change in Real Output
% Change in Velocity = 5% - 2% - 3%
% Change in Velocity = 0%

Therefore, the percentage change in velocity is 0%.

Assuming a Long-Run Relationship, If Nominal Money Supply Grows at a Rate