Suppose that real output is constant, the real monetary base is $30 billion and revenues from the inflation tax are $600 million.What is the inflation rate?
A)5)0%
B)3)6%
C)2)0%
D)1)2%
E)it cannot be determined from this information

Question

Quizplus · Accepted Answer

The inflation rate can be calculated as the percentage change in the nominal money supply (M) from the previous year. Since real output is constant, the nominal GDP is also constant. Therefore, the velocity of money (V) is constant. Thus, M x V = nominal GDP. Therefore, the percentage change in M is equal to the percentage change in nominal GDP. The inflation tax revenue of $600 million is also equal to the percentage of the nominal GDP. Therefore, the inflation rate is equal to $600 million divided by $30 billion, which is 2.0%.

Suppose That Real Output Is Constant, the Real Monetary Base