In an economy in which velocity of money in circulation is constant and real output grows at an average rate of 3 percent per year,a 5 percent average rate of growth in the money supply would result in a:
A)constant price level.
B)slowly increasing price level.
C)slowly decreasing price level.
D)stable 4 percent growth in real GDP.
E)stable 4 percent growth in nominal GDP.

Question

Quizplus · Accepted Answer

With a constant velocity of money in circulation and real output growth at 3 percent, a 5 percent average rate of growth in the money supply would result in a slowly increasing price level due to an excess supply of money. This is because there is more money chasing the same amount of goods and services which leads to inflation. Therefore, choice B is the correct answer.

In an Economy in Which Velocity of Money in Circulation