The rules-based monetary policy reads: The annual growth rate in the money supply will be equal to the average annual growth rate in Real GDP minus the growth rate in velocity.If the average growth rate in Real GDP this year is 3 percent and the growth rate in velocity is 2 percent,then the money supply will increase by ______________ percent this year.
A) 1
B) 2
C) 3
D) 4

Question

Quizplus · Accepted Answer

As per the given rule-based monetary policy, 
Annual growth rate in money supply = Average annual growth rate in Real GDP - Growth rate in velocity.

Substituting the given values: 
Annual growth rate in money supply = 3% - 2% = 1%

Therefore, the money supply will increase by 1% this year. Hence, the best choice is A) 1.

The Rules-Based Monetary Policy Reads: the Annual Growth Rate in the Money