The money supply in Freedonia is $100 billion.Nominal GDP is $800 billion and real GDP is $400 billion.The central bank of Freedonia has instituted a policy of zero inflation.Assuming that velocity is stable,if real GDP grows by 20 percent this year,how will the central bank of Freedonia change the money supply this year?

Question

Quizplus · Accepted Answer

To maintain zero inflation with a stable velocity, the money supply should grow at the same rate as real GDP. Since real GDP is growing by 20%, the money supply should also increase by 20%.

The Money Supply in Freedonia Is $100 Billion