Consider an economy where the growth rate of real GDP is 6 percent and the growth rate of money supply is 8 percent.If the quantity theory of money holds,the inflation rate in the economy will be ________.
A) 2 percent
B) 6 percent
C) 8 percent
D) 14 percent

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the inflation rate can be approximated by the difference between the growth rate of the money supply and the growth rate of real GDP. Therefore, if the money supply grows at 8 percent and real GDP grows at 6 percent, the inflation rate would be approximately 2 percent (8% - 6% = 2%).

Consider an Economy Where the Growth Rate of Real GDP