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...
Moving along the aggregate expenditure (AE) curve, when real GDP increases, aggregate planned expenditures increase
A) by the same percentage as does real GDP. B) by more than real GDP. C) proportionately with real GDP. D) by the same amount as does real GDP. E) by less than real GDP.
One Sunday afternoon, your mother tells you and your brother that you can quickly make some money by helping her wash dishes. Both of you decide to help her. Once both of you are done with the work, your mother gives you a $20 bill
She also says that you can divide the money between yourself and your brother in any proportion you want, but if your brother does not accept the amount he is being given, she will take all of the money back. a) How much money should you offer your brother if he prefers more money to less? b) How much money should you offer to your brother if you know that your brother prefers fairness to money?