Asked by Frank Salaiz on Jul 14, 2024
Verified
In an economy in which real output grows at an average rate of 3 percent per year,a 7 percent average rate of growth in the money supply would result in a(n) :
A) inflation rate of 4 percent,if velocity of money in circulation is constant.
B) inflation rate of -4 percent,if velocity of money in circulation is constant.
C) $7 increase in the price level each year.
D) $7 decrease in the price level each year.
E) increase in the velocity of money in circulation.
Velocity of Money
The rate at which money circulates in the economy, indicating the number of times a unit of currency is used to purchase goods and services within a given timeframe.
Inflation Rate
The rate of increase in the average price of goods and services, leading to a decrease in the value of money.
Money Supply
The sum of all financial assets, including cash, coins, and bank account balances, present in an economy at any given moment.
- Gain insight into the quantity theory of money and its effects on inflation and the rise of nominal GDP.
- Detail the enduring neutrality of monetary supply in the long run and its effects on inflation, unemployment, and real GDP.
Verified Answer
JE
Jordan EvraaJul 18, 2024
Final Answer :
A
Explanation :
According to the quantity theory of money, MV = PY, where M is the money supply, V is the velocity of money, P is the price level and Y is real output. Assuming velocity remains constant, M grows by 7% and Y grows by 3%, resulting in a combined increase in PY of 10%. Therefore, if V is constant, an inflation rate of 4% (10% - 3% = 7%) would result.
Learning Objectives
- Gain insight into the quantity theory of money and its effects on inflation and the rise of nominal GDP.
- Detail the enduring neutrality of monetary supply in the long run and its effects on inflation, unemployment, and real GDP.