Question

3. Problems and Applications Q3 ch 30 It is sometimes suggested that the Federal Reserve should...

3. Problems and Applications Q3 ch 30

It is sometimes suggested that the Federal Reserve should try to achieve zero inflation. Assume that velocity is constant.

True or False: In order to achieve this zero-inflation goal, the rate of money growth must equal velocity.

True
False

Homework Answers

Answer #1

False.

Explanation: Following is the relationship among money growth (?M), change in the velocity of money (?V), change in prices (?P), and a change in real GDP (?Y):

?M + ?V = ?P + ?Y

So, if velocity is constant i.e. ?V = 0 and we want to achieve zero inflation i.e. ?P = 0, in that case, putting the values, we get:

?M + 0 = 0 + ?Y

or, ?M = ?Y

Therefore, in order to achieve zero inflation, the rate of money growth should be equal to the change in the real GDP.

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