Using the quantity equation,if the velocity of money grows at 5 percent,the money supply grows at 10 percent,and real GDP grows at 4 percent,then the inflation rate will be
A)19 percent.
B)15 percent.
C)11 percent.
D)6 percent.

Question

Quizplus · Accepted Answer

The quantity equation is MV=PY where M is money supply, V is velocity of money, P is price level, and Y is real GDP. Solving for P, we get P=MV/Y. If velocity of money grows by 5%, then V=1.05. If money supply grows by 10%, then M=1.1. And if real GDP grows by 4%, then Y=1.04. Plugging these values into the equation, we get P=1.1*1.05/1.04=1.116. Therefore, the inflation rate is (1.116-1)*100=11.6%, which is closest to option C, 11%.

Using the Quantity Equation,if the Velocity of Money Grows at 5