Over the past year, Macroland's economy experienced several changes. Money supply grew by 3%, velocity grew by 1%, real GDP grew by 2%, and employment grew by 1.5%. According to the equation of exchange, what inflation rate would be expected in Macroland for this time period?
A) 2%
B) 2.5%
C) 0%
D) 6%

Question

Quizplus · Accepted Answer

The equation of exchange is MV = PY, where M is money supply, V is velocity, P is the price level (inflation), and Y is real GDP. The growth rates can be added: 3% (M) + 1% (V) = 4% (nominal GDP growth). Since real GDP (Y) grew by 2%, the expected inflation rate (P) is 4% - 2% = 2%.

Over the Past Year, Macroland's Economy Experienced Several Changes