Question

If the growth rate of the money supply is 8%, velocity is constant, and real GDP grows at 4% per year on average, then the inflation rate will be _____%.If the growth rate of the money supply increases to 13%, velocity is constant, and real GDP grows at 2% per year on average, then the inflation rate will be _____%.If the growth rate of the money supply increases to 13%, velocity grows at 11%, and real GDP grows at 2% per year on average, then the inflation rate will be ______%.

Answer 1

Step-by-step explanation:

The formula to solve the question is:

∆M + ∆V = ∆P + ∆Y

where,

∆M = relation among money growth

∆V = changes in money velocity

P = change in prices

∆Y = change in real GDP

1. For question 1,

∆M = 8%, ∆V = 0, ∆Y = 4

∆M + ∆V = ∆P + ∆Y

8% + 0 = ∆P + 4%

∆P = 8% - 4%

Inflation rate = 4%

2. ∆M = 13%, ∆V = 0, ∆Y = 2%

∆M + ∆V = ∆P + ∆Y

13% + 0 = ∆P + 2%

∆P = 13% - 2%

∆P = 11%

Inflation rate = 11%

3. ∆M = 13, ∆V = 11, ∆Y = 2

∆M + ∆V = ∆P + ∆Y

13% + 11% = ∆P + 2%

∆P = 13% + 11% - 2%

∆P = 22%

Inflation rate = 22%