Consider an economy where the growth rate of money supply is 2 percent and the inflation rate is 2 percent.If the quantity theory of money holds,the growth rate of real GDP in the economy will be ________.

Question

Quizplus · Accepted Answer

The quantity theory of money is often expressed by the equation MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced (real GDP). If the growth rate of the money supply (2 percent) equals the inflation rate (2 percent), it implies that the increase in money supply is being absorbed by the increase in price level without changing the velocity of money or the quantity of goods and services produced. Therefore, the growth rate of real GDP would be 0 percent.

Consider an Economy Where the Growth Rate of Money Supply