If the real GDP growth is 4 percent per year,the money growth rate is 6 percent,and velocity is constant,using the quantity theory,the inflation rate is:

Question

Quizplus · Accepted Answer

The quantity theory of money equation is MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP.

Solving for P, we get P = MV/Y.

If velocity is constant, we can simplify the equation to P = kM/Y, where k is a constant.

We are given that real GDP growth is 4 percent per year, so Y is growing at a rate of 4 percent per year.

We are also given that the money growth rate is 6 percent per year. Therefore, M is growing at a rate of 6 percent per year.

Using the equation P = kM/Y, we can see that if Y is growing at 4 percent per year and M is growing at 6 percent per year, then P must be growing at 2 percent per year (i.e. inflation rate).

Therefore, the correct answer is D) 2 percent.

If the Real GDP Growth Is 4 Percent Per Year,the