If the quantity of money grows at 4 percent a year, velocity grows at 2 percent, and real GDP grows at 2 percent a year, then the inflation rate equals
A)8 percent.
B)0 percent.
C)4 percent.
D)6 percent.
E)2 percent.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the inflation rate can be calculated using the formula: Inflation Rate = Growth Rate of Money Supply + Growth Rate of Velocity - Growth Rate of Real GDP. Here, it is 4% (money supply) + 2% (velocity) - 2% (real GDP) = 4%.

If the Quantity of Money Grows at 4 Percent a Year