If velocity and output were nearly constant, Select one:

If velocity and output were nearly constant,

Select one:

a. the inflation rate would be much higher than the money supply growth rate.

b. the inflation rate would be about the same as the money supply growth rate.

c. the inflation rate would be much lower than the money supply growth rate.

d. any of the above would be possible.

Solutions

Expert Solution

According to the quantity theory of money, the equation of exchange is written as follows

PY = MV where

P = Price level; Y = Real GDP; M = Money supply, V = Velocity of money

The percentage change form of the equation can be written as:

% change in P + % change in Y = % change in M + % change in V

If velocity and output are constant, % change in V = % change in Y = 0

=> % change in P + 0 = % change in M + 0

=> % change in P = % change in M

% change in P = Inflation rate = % change in M = Money supply growth rate

Ans: b. the inflation rate would be about the same as the money supply growth rate

Rahul Sunny answered 1 year ago

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