Suppose that real GDP grows by 3 percent a year, the quantity of money grows 6 percent a year, and velocity grows by 1 percent.In the long run, the inflation rate equals
A) 9 percent.
B) 4 percent.
C) 5 percent.
D) 12 percent.
E) 10 percent.

Question

Quizplus · Accepted Answer

In the long run, the quantity theory of money states that the inflation rate is equal to the growth rate of money supply minus the growth rate of real GDP, minus the growth rate of velocity.

Therefore, inflation rate = 6% - 3% - 1% = 2%

So the best choice is B, which is 4 percent.

Suppose That Real GDP Grows by 3 Percent a Year