Under a constant growth rate of money rule of 2 percent in an economy in which Real GDP grows at an average rate of 1 percent and velocity is constant,the inflation rate is
A) 3 percent.
B) -3 percent.
C) 1 percent.
D) -1 percent.
E) constant at zero.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the inflation rate can be calculated as the growth rate of money supply minus the growth rate of real GDP. Here, the money supply grows at 2 percent, and real GDP grows at 1 percent, so the inflation rate is 2% - 1% = 1%.

Under a Constant Growth Rate of Money Rule of 2