Suppose the rate of growth in output is 3.5 percent. The rate of growth in the money supply is 6.0 percent. The rate of growth in velocity is 0 percent. What is the inflation rate?

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PQ. If we assume that Q is constant in the short run, then we can say that the inflation rate is equal to the growth rate in the money supply (6.0 percent) minus the growth rate in real output (3.5 percent) minus the growth rate in velocity (0 percent). Therefore, the inflation rate is 2.5 percent.

Suppose the Rate of Growth in Output Is 3