If the economy's real GDP is growing at 3 percent each year and velocity is constant, for the price level to increase:
A)the money supply would have to grow at more than 3 percent per year.
B)the money supply would have to grow at exactly 3 percent per year.
C)the money supply would have to grow at less than 3 percent per year.
D)the money supply would have to remain stable.

Question

If the economy's real GDP is growing at 3 percent each year and velocity is constant, for the price level to increase:
A)​the money supply would have to grow at more than 3 percent per year.
B)​the money supply would have to grow at exactly 3 percent per year.
C)​the money supply would have to grow at less than 3 percent per year.
D)​the money supply would have to remain stable.

Quizplus · Accepted Answer

In order for the price level to increase, there must be an excess amount of money in circulation. If the real GDP is growing at a steady rate of 3 percent, then the demand for goods and services is increasing, which will lead to an increase in prices if the money supply remains stagnant. Therefore, the money supply would have to grow at a rate greater than 3 percent in order to accommodate the increased demand and prevent a shortage of money.

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