The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion. The central bank of Freedonia has instituted a policy of zero inflation. Assuming that velocity is stable, if real GDP grows by 10 percent this year, how will the central bank of Freedonia change the money supply this year?

Question

Quizplus · Accepted Answer

To maintain zero inflation with a stable velocity, the money supply should grow at the same rate as real GDP, which is 10 percent.

The Money Supply in Freedonia Is $200 Billion