According to the quantity theory of money,if the money supply grows at 20 percent and real GDP grows at 5 percent,then the inflation rate will be

Question

Quizplus · Accepted Answer

According to the quantity theory of money, inflation is directly related to the growth rate of the money supply relative to the growth rate of real GDP. The equation for the quantity theory of money is: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP.

Assuming velocity of money remains constant, we can calculate the inflation rate using the equation:

Inflation Rate = (Percentage Change in Money Supply) - (Percentage Change in Real GDP) 
                   = 20% - 5% 
                   = 15%

Therefore, the correct answer is (A) 15 percent.

According to the Quantity Theory of Money,if the Money Supply