Suppose the long-run annual growth rate in real GDP is 4 percent. If monetary authorities want stable prices over the long-run, they should allow the money supply to:

Question

Quizplus · Accepted Answer

To achieve stable prices over the long-run, the rate of inflation should be zero. Assuming that the velocity of money (the rate at which money is spent) remains constant, the money supply should therefore also grow at 4 percent annually to match the potential real GDP growth of the economy. This would result in a stable price level with a zero percent inflation rate. Therefore, the monetary authorities should allow the money supply to increase at 4 percent annually.

Suppose the Long-Run Annual Growth Rate in Real GDP Is