If a fixed money growth rate of 4 percent per year is followed and the growth rate of the natural level of real GDP is 4 percent per year, the average rate of inflation is:
A)8 percent.
B)4 percent.
C)zero.
D)1-2 percent.

Question

If a fixed money growth rate of 4 percent per year is followed and the growth rate of the natural level of real GDP is 4 percent per year, the average rate of inflation is:
A)​8 percent.
B)​4 percent.
C)​zero.
D)​1-2 percent.

Quizplus · Accepted Answer

The fixed money growth rate of 4 percent per year matches the growth rate of real GDP of 4 percent per year, resulting in a zero average rate of inflation. In other words, the value of money is consistent with the growth rate of the real economy, so there is no need for inflation or deflation to adjust to imbalances between the money supply and the level of real output.

If a Fixed Money Growth Rate of 4 Percent Per