Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 4% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?
A) 7%
B) 4%
C) 1%
D) -1%

Question

Quizplus · Accepted Answer

The equation of exchange is MV = PY. With constant velocity (V), if the money supply (M) grows at 4% and real GDP (Y) grows at 3%, the difference (1%) is the long-run inflation rate (P).

Suppose the Full-Employment Level of Real GDP Is Increasing at a Rate