Question

The velocity of circulation grows at 1 percent and real GDP grows at 3 percent. If...

The velocity of circulation grows at 1 percent and real GDP grows at 3 percent. If the quantity of money grows at 2 percent, the inflation rate is

Select one:

a. zero.

b. 8 percent.

c. 10 percent.

d. 4 percent.

e. 2 percent.

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Homework Answers

Answer #1

Option A.

  • Inflation rate can be defined as the difference between nominal interest rate and the real interest rate or it can be also defined as the rate of change in price level.
  • To find the inflation rate we use the money exchange rate equation, M + V = P + Y.
  • Here M is the quantity of money, V is the velocity of money, P is the price level and Y is the Real GDP.
  • To calculate inflation rate we need to find the value of P as we know that inflation rate is the rate of change in price level.
  • Given that, M = 2%, V = 1%, Y = 3%

Substituting in the equation we get, 2 + 1 = P + 3

By Rearranging we get, P = 2 + 1 - 3 = 3 - 3 = 0.

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