Suppose the money growth rate is 3 percent, the velocity of circulation is constant, and real GDP is growing at 2 percent. What is the inflation rate?
A) 1 percent
B) 5 percent
C) 3 percent
D) 6 percent

Question

Quizplus · Accepted Answer

According to the Quantity Theory of Money, the inflation rate can be calculated using the formula: Inflation Rate = Money Growth Rate + Velocity Growth Rate - Real GDP Growth Rate. Given that the money growth rate is 3 percent, the velocity of circulation is constant (implying a 0 percent growth rate), and real GDP is growing at 2 percent, the inflation rate is 3% + 0% - 2% = 1%.

Suppose the Money Growth Rate Is 3 Percent, the Velocity