If the growth rate of real GDP is 3 percent,velocity is constant,and the money supply grows at 9 percent,the rate of inflation will be approximately
A)3 percent.
B)6 percent.
C)9 percent.
D)12 percent.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. Assuming velocity is constant, a 9 percent increase in M will lead to a 9 percent increase in PY. With Y growing at 3 percent, P will increase by the difference between 9 percent and 3 percent, which is 6 percent. Therefore, the rate of inflation will be approximately 6 percent.

If the Growth Rate of Real GDP Is 3 Percent,velocity