If the economy's real GDP is growing at 3 percent each year and velocity is constant, for the price level to increase, _____.

Question

Quizplus · Accepted Answer

In order for the price level to increase, there must be more money chasing the same amount of goods and services. If the real GDP is growing at 3 percent each year and velocity is constant, then the demand for money is also growing at 3 percent each year. Therefore, for the price level to increase, the money supply would have to grow at more than 3 percent per year.

If the Economy's Real GDP Is Growing at 3 Percent