If real GDP grows at 4 percent, the quantity of money grows at 6 percent, and velocity does not change, then in the long run the inflation rate is
A) 4 percent.
B) 6 percent.
C) 10 percent.
D) 2 percent.
E) 1.5 percent.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, if velocity is constant, the inflation rate is approximately the growth rate of the money supply minus the growth rate of real GDP. Here, 6% (money growth) - 4% (real GDP growth) = 2% inflation rate.

If Real GDP Grows at 4 Percent, the Quantity of Money