What does the quantity theory of money imply? If the growth rate of money supply and growth rate of real GDP in an economy are 8% and 6%, respectively, then what is the inflation rate in the economy?
What will be an ideal response?
The quantity theory of money implies that inflation is equal to the gap between the growth rate of money supply and real GDP.
In this case, inflation rate = growth rate of money supply - growth rate of real GDP
= 8% - 6% = 2%.
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