If real GDP grows by 3 percent, the velocity of circulation grows by 4 percent, and the quantity of money grows by 3 percent, then in the long run the inflation rate is
A) 4 percent.
B) 0 percent.
C) -4 percent.
D) 10 percent.
E) 4 percent

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the inflation rate can be calculated using the formula: Inflation rate = Growth rate of money supply + Growth rate of velocity - Growth rate of real GDP. Substituting the given values: 3% (money supply) + 4% (velocity) - 3% (real GDP) = 4%.

If Real GDP Grows by 3 Percent, the Velocity of Circulation