Question

Suppose that in an economy, the growth rate of the money supply and the growth rate of real GDP both increase. Then, assuming the growth rate of the velocity of money is constant, all else equal, according to the quantity equation of money, inflation:

A. increases (unambiguously).
B. decreases (unambiguously).
C. remains unchanged (unambiguously).
D. may increase, decrease, or remain unchanged.

Answer 1

a. If the growth rate of the money supply and the growth rate of real GDP both increase in an economy, and assuming the growth rate of the velocity of money is constant, all else equal, inflation increases.

Step-by-step explanation:

If the growth rate of the money supply and the growth rate of real GDP both increase in an economy, and assuming the growth rate of the velocity of money is constant, all else equal, according to the quantity equation of money, inflation a. increases (unambiguously).