When the rate of growth rate of money is constant:

Question

Quizplus · Accepted Answer

When the rate of growth rate of money is constant, the inflation rate equals the growth rate of money due to the quantity theory of money. This is known as the monetary neutrality assumption, where changes in the money supply only affect nominal variables like prices and wages, but not real variables like output and employment. The nominal interest rate may or may not rise depending on other factors like economic growth and inflation expectations, but it is not determined solely by the growth rate of money. Real money balance can also remain constant if the rate of growth of real output matches the rate of growth of money, so the correct answer is A.

When the Rate of Growth Rate of Money Is Constant