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Under what conditions will the rate of inflation exactly equal the rate of monetary growth? Why...

Under what conditions will the rate of inflation exactly equal the rate of monetary growth? Why is this presumed to be a fairly accurate long-run relationship?

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Answer #1

Quantity theory of money implies that there is proportional relationship between money growth rate and inflation.

MV = PY

M = Money growth Rate

V = Velicity of money

P = Price level

Y= Real Income or GDP

If V and Y are constant, then there is proportional relationship between money growth rate and price level.

Accurate relationship between money growth rate and price level is presumed. If full employment is achieved in long run, there is no scope for rise in GDP in long run. Hence, rise in money growth rate will lead to proportionate rise in price level.

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