According to the quantity theory of money, if the monetary authorities allow the money supply to grow at a rate of 6 percent in an economy that is growing by 2 percent in real terms, then inflation will be:
A)2 percent.
B)4 percent.
C)6 percent.
D)8 percent.

Question

Quizplus · Accepted Answer

The quantity theory of money suggests that if the money supply grows at a faster rate than real output, the difference will be reflected in inflation. Here, with a 6 percent growth in money supply and 2 percent real growth, inflation would be 4 percent (6% - 2% = 4%).

According to the Quantity Theory of Money, If the Monetary