Under a constant growth rate of money rule of 3 percent in an economy in which Real GDP grows at an average rate of 3 percent and velocity is constant,the inflation rate is
A) 6 percent.
B) -6 percent.
C) 9 percent.
D) -9 percent.
E) constant at zero.

Question

Quizplus · Accepted Answer

According to the Quantity Theory of Money, MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. If the money supply grows at 3 percent, real GDP grows at 3 percent, and velocity is constant, then the increase in the money supply is exactly offset by the increase in real GDP, leaving the price level (and thus the inflation rate) constant at zero.

Under a Constant Growth Rate of Money Rule of 3