If the growth rate of the quantity of money is 4 percent per year, potential GDP and real GDP grow at 3 percent per year, and velocity does not change, in the long run what is the inflation rate?
What will be an ideal response?
With velocity constant, in the long run, the inflation rate equals the growth in the quantity of money minus the growth in potential GDP, or (4 percent) - (3 percent) = 1 percent.
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