According to monetary theory, if the money supply is growing at a rate of 5 percent, real GDP is growing at a rate of 2 percent, and velocity is constant, what will the inflation rate be?
What will be an ideal response?
Using the growth rate version of the quantity equation, we have:
growth rate of the price level (or inflation rate) = growth rate of money + growth rate of velocity - growth rate of real output.
If velocity does not change, then the growth rate of velocity is zero. Then:
growth rate of the price level (or inflation rate) = growth rate of money - growth rate of output.
Substituting in our values:
growth rate of the price level (or inflation rate) = 5 percent - 2 percent = 3 percent.
You might also like to view...
The budget line facing a household includes information on
A. prices of two goods and household income. B. household income and the price of money. C. the price of one good and household income. D. the price of two goods but no information on household income. E. preferences of goods at various prices.
The only type of business that faces unlimited liability is a sole proprietorship
Indicate whether the statement is true or false
Tax collected based on a taxpayer's spending is known as: a. excise tax
b. consumption tax. c. gift tax. d. income tax.
If a large percentage increase in the price of a good results in a small percentage reduction in the quantity demanded of the good, demand is said to be
a. horizontal. b. relatively inelastic. c. relatively elastic. d. income proof.