In: Economics
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.)
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%