Assume that the velocity of money is constant. If GDP is growing at 1% per year,...

Assume that the velocity of money is constant. If GDP is growing at 1% per year, and the Fed wants to keep inflation at 3%, the Fed should increase the money supply at a rate of ______ percent.
(Your answer should be a number.)

Solutions

Expert Solution

According to quantity theor of money:

%change in money supply + %change in velocity of money = %change in real GDP + %change in price level

%change in price level / inflation = 3%

%change in GDP growth = 1%

%change in velocity of money = 0, it is given that velocity is constant

%change in money supply + 0% = 1% + 3%

%change in money supply must be 4%

Rahul Sunny answered 1 year ago

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