Suppose that for a given year money growth is 5 percent, real GDP growth is 2 percent, and the inflation rate is 5 percent. According to the growth version of the quantity equation, velocity growth would be
A) 0 percent.
B) 2 percent.
C) 8 percent.
D) 12.5 percent.

Question

Quizplus · Accepted Answer

According to the growth version of the quantity equation: MV = PY
where M is the money supply, V is velocity, P is the price level, and Y is real GDP.

The equation can be rewritten as: 
%ΔM + %ΔV = %ΔP + %ΔY

Given:
%ΔM = 5% 
%ΔP = 5%
%ΔY = 2%

To find %ΔV, we can rearrange the equation: 
%ΔV = %ΔP + %ΔY - %ΔM

%ΔV = 5% + 2% - 5% = 2%

Therefore, velocity growth would be 2 percent.

Suppose That for a Given Year Money Growth Is 5