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

Question

Quizplus · Accepted Answer

According to the quantity theory of money, MV = PQ, where M is the money supply, V is velocity, P is the price level, and Q is real GDP. Solving for P, we get P = MV/Q. Since velocity is assumed constant, %ΔP = %ΔM - %ΔQ, where %ΔP is the inflation rate, %ΔM is the growth rate of the money supply, and %ΔQ is the growth rate of real GDP. Plugging in the given values, %ΔP = 4% - 6% = -2%. Note that the negative sign indicates deflation, not inflation. To find the inflation rate, we take the absolute value, which is 2%. Therefore, the answer is B.

If the Real GDP Growth Is 6 Percent Per Year