Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run? A) If the growth rate in Y_P exceeds the money growth rate, there will be inflation. B) If the money growth rate is less than the growth rate in Y_P, there will be deflation. C) If the money supply grows at the same rate as growth in Y_P, the price level will grow at a constant rate. D) If the money supply grows at the same rate as growth in Y_P, the price level will also increase at the same rate as growth in Y_P.

Question

Quizplus · Accepted Answer

If the money growth rate is less than the growth rate in Y_P, there will be deflation because the supply of money is not keeping up with the increase in potential output, leading to downward pressure on prices.

Which of the Following Predictions Can Be Made Using the Growth