If the velocity remains constant, the money supply increases by 4% per year, and real GDP increases by 2%, then inflation $\pi$ will equal

Question

If the velocity remains constant, the money supply increases by 4% per year, and real GDP increases by 2%, then inflation  $\pi$ will equal

Quizplus · Accepted Answer

According to the quantity theory of money, if the velocity of money is constant, the inflation rate $\pi$ is approximately equal to the growth rate of the money supply minus the growth rate of real GDP. Therefore, $\pi = 4\% - 2\% = 2\%$.

If the Velocity Remains Constant, the Money Supply Increases by 4