Suppose that real GDP grows by 3 percent a year, the quantity of money grows 5 percent a year, and velocity does not change. In the long run, the inflation rate equals
A)8 percent.
B)10 percent.
C)3 percent.
D)5 percent.
E)2 percent.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, if velocity is constant, the inflation rate is the growth rate of money supply minus the growth rate of real GDP. Thus, 5% - 3% = 2%.

Suppose That Real GDP Grows by 3 Percent a Year