Question

Suppose the government of a country wants to achieve long run growth and they are thinking...

  1. Suppose the government of a country wants to achieve long run growth and they are thinking they can do this by printing money. Is this an effective policy for growth?
  1. In country BETA, full-employment level of real GDP is increasing at a rate of 6% per period and the money supply is growing at a 8% rate. What will be the long-run inflation rate in this country, assuming constant velocity?
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Answer #1

i.

Printing money to improve the economic growth is not considered as the best practice/policy. Printing Currency leads to sudden flow of money supply in the economy. Such flow increases the demand for goods and services significantly.

Increased demand increases the price of goods. Hence, the policy of printing money comes with the cost of higher inflation. So, it is not an effective policy for growth.

ii.

Growth rate of real GDP = 6%
Growth Rate in Money Supply = 8%

According to the quantity theory of money, we have

Inflation Rate = Money Growth Rate + Growth in Velocity - Growth in Real GDP

Inflation Rate = 8 + 0 - 6

Long Run Inflation Rate = 2%

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