Suppose that for a given year money growth is 10 percent, real GDP growth is 8 percent, and velocity is constant. According to the growth version of the quantity equation, the inflation rate would be
A) -2 percent.
B) 1.25 percent.
C) 2 percent.
D) 18 percent.

Question

Quizplus · Accepted Answer

The growth version of the quantity equation is MV = PQ, where M is the money supply, V is velocity, P is the price level, and Q is real GDP. We can rearrange this equation to solve for the inflation rate (π):

π = (M/V) - (Q/Q)

Plugging in the values given:

π = 0.1 - 0.08 = 0.02

Therefore, the inflation rate would be 2 percent. The correct choice is C.

Suppose That for a Given Year Money Growth Is 10