Question

- Suppose the annual growth rate of real GDP for some fictional
economy is 6%, the growth rate of velocity is 0%, and the growth
rate of the money supply is 11%.
- Using the quantity theory of money, what is the current rate of inflation?
- Using the quantity theory of money, what will happen to the inflation rate if the growth of the money supply increases to 15%?
- Using the quantity theory of money, what will happen to the inflation rate if the growth of the money supply increases to 16%, and at the same time, the growth rate of velocity increases to 4%?
- Given what we know about the value of money, calculate the inflation rate for this economy if the value of money falls from 0.1429 to 0.0909. (not related to parts a-c)

Answer #1

a) Quantity theory of money : %change in M + % change in V = % change in P + % change in Y

% change in P ( Rate of inflation ) = 11% - 6% = **5%**

b) Inflation Rate = 15% + 0% - 6% = **9%**

c) Inflation Rate = 16% + 4% - 6% = **14%**

d) Rate of inflation = (0.1429 - 0.0909 ) / 0.1429 * 100 =
**36.39 %**

When inflation occurs the value of money decreases . We calculate the decrease percentage with respect to initial value of money . Money can buy lesser quantity of goods due to inflation .

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