Question

Suppose the real GDP of this economy grows at an annual rate of 5%. Assume that the central bank would like to keep the inflation rate at 2% per year. If the velocity of money remains constant, the central bank can achieve its goal by pursing an annual money growth rate of____________-.

Answer 1

The correct answer is 7%.

Step-by-step explanation:

The real GDP of an economy is said to be increasing at an annual rate of 5%.

The inflation rate is kept low at 2%.

The velocity of money is assumed to be constant.

In this situation, the annual money growth rate will be equal to the sum of the inflation rate and rate of growth of real GDP.

Annual money growth rate

= Inflation rate + Real GDP growth rate

= 2% + 5%

= 7%