If real GDP grows by 3 percent, the velocity of circulation grows by 4 percent, and the quantity of money grows by 3 percent, then in the long run the inflation rate is
A)10 percent.
B)-4 percent.
C)7 percent.
D)4 percent.
E)0 percent.

Question

Quizplus · Accepted Answer

The inflation rate can be determined using the equation of exchange in percentage terms: %ΔP = %ΔM + %ΔV - %ΔY. Here, %ΔM (growth rate of money supply) is 3%, %ΔV (growth rate of velocity) is 4%, and %ΔY (growth rate of real GDP) is 3%. Therefore, the inflation rate is 3% + 4% - 3% = 4%.

If Real GDP Grows by 3 Percent, the Velocity of Circulation