In a small economy, the rate of money growth for the current year is 2%. Velocity of money circulation is stable. Inflation is expected to be about 1.5% over the current year. What is the short-run economic growth rate?
A) 3.5%
B) 1.5%
C) 0.5%
D) 2%

Question

Quizplus · Accepted Answer

The short-run economic growth rate can be calculated using the equation: (growth rate of money supply) + (velocity growth rate) - (inflation rate) = (growth rate of real output). In this case, we know the growth rate of money supply is 2%, the velocity of money circulation is stable (so velocity growth rate is 0%), and the expected inflation rate is 1.5%. Therefore, the short-run economic growth rate is 0.5% [(2% + 0% - 1.5%) = 0.5%].

In a Small Economy, the Rate of Money Growth for the Current