Suppose that for a given year money growth is 3 percent, real GDP growth is 1 percent, and the inflation rate is 2 percent. According to the growth version of the quantity equation, velocity growth would be
A) 0 percent.
B) 2 percent.
C) 3 percent.
D) 4 percent.

Question

Quizplus · Accepted Answer

The growth version of the quantity equation (MV=PY) can be rearranged to show the relationship between money growth (M), velocity growth (V), inflation (P), and real GDP growth (Y). In this case, if money growth is 3 percent, real GDP growth is 1 percent, and inflation is 2 percent, the equation implies that velocity growth must be 0 percent to balance the equation, as the sum of real GDP growth and inflation equals the money growth rate.

Suppose That for a Given Year Money Growth Is 3