Under a constant growth rate of money rule of 4 percent in an economy in which Real GDP grows at an average rate of 3 percent and velocity is constant,the inflation rate is

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PY, where M is the money supply, V is velocity, P is the price level and Y is real GDP. Assuming velocity is constant, a constant 4% growth rate of M implies a 4% growth rate of PY. With a 3% growth rate of Y, this implies a 1% inflation rate (4% - 3% = 1%). Therefore, the correct answer is (C) 1%.

Under a Constant Growth Rate of Money Rule of 4