Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory,

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According to the Quantity Theory of Money, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. In this scenario, we know that V is constant and Y is growing at a rate of 3% annually. Therefore, if M is growing at a rate of 8% annually, we can solve for the rate of inflation:

(8%) + (constant V%) = (3%) + (P%)

P% = 5%

So, inflation averaged 5% per year.

To calculate the real rate of return, we can use the Fisher Equation:

Nominal Interest Rate - Inflation Rate = Real Interest Rate

(9%) - (5%) = 4%

Therefore, the real rate of return was 4%.

Thus, the correct answer is C.

Suppose the Money Supply Grew at an Average Annual Rate