According to the quantity theory of money,if the long-run economic growth rate is 2.5%,by how much should the Fed increase the money supply if it wants inflation to be 2%?
A) 0.5%
B) 1.25%
C) 4.5%
D) 5%

Question

Quizplus · Accepted Answer

The quantity theory of money is often expressed by the equation MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the output of goods and services. To achieve a 2% inflation rate while the economy grows at 2.5%, the money supply should increase by the sum of the growth rate and the desired inflation rate, which is 2.5% + 2% = 4.5%.

According to the Quantity Theory of Money,if the Long-Run Economic