If the growth rate of the money supply is 4 percent, the growth rate of velocity of money is 1 percent, and real output growth is 2 percent, what is the inflation rate?

Question

Quizplus · Accepted Answer

The inflation rate can be calculated using the Fisher equation of exchange: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level (inflation), and Q is the quantity of goods and services produced (real output). The growth rates can be added: 4% (money supply) + 1% (velocity) = Inflation + 2% (real output). Solving for inflation gives us 3%.

If the Growth Rate of the Money Supply Is 4