Suppose the economy's real output grows at an average rate of 3 percent per year.And suppose there is a 7 percent average rate of growth in the money supply, and velocity is constant.How would the inflation rate be affected?
A) The inflation rate would be -4 percent.
B) The inflation rate would be 4 percent.
C) The inflation rate would be 7 percent.
D) The inflation rate would be 10 percent.

Question

Suppose the economy's real output grows at an average rate of 3 percent per year.And suppose there is a 7 percent average rate of growth in the money supply, and velocity is constant.How would the inflation rate be affected?  
A) The inflation rate would be -4 percent. 
B) The inflation rate would be 4 percent. 
C) The inflation rate would be 7 percent. 
D) The inflation rate would be 10 percent.

Quizplus · Accepted Answer

According to the quantity theory of money, the inflation rate can be calculated as the percentage growth rate in the money supply minus the percentage growth rate in real output. Therefore, inflation rate = 7% - 3% = 4%. So, option B is the correct answer.

Suppose the Economy's Real Output Grows at an Average Rate