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In the quantity theory equation (in terms of growth rates), we have , where is the inflation rate, is the growth rate of money supply,  is the growth rate of money velocity, and  is the growth rate of GDP. What is one implication of increasing money supply growth from 3% to 5% if economic growth is generally constant at 3%, and velocity is constant at 5%?A) Inflation will decrease from 7% to 5%B) Inflation will decrease from 6% to 1%C) Inflation will rise from 3% to 5%D) Inflation will rise from 5% to 7%

Question

In the quantity theory equation (in terms of growth rates), we have , where is the inflation rate, is the growth rate of money supply,  is the growth rate of money velocity, and  is the growth rate of GDP. What is one implication of increasing money supply growth from 3% to 5% if economic growth is generally constant at 3%, and velocity is constant at 5%?

A) Inflation will decrease from 7% to 5%

B) Inflation will decrease from 6% to 1%

C) Inflation will rise from 3% to 5%

D) Inflation will rise from 5% to 7%

check_circleAnswer
Step 1

Assume that,

P = Inflation rate / Price level

M = Money supply,

V = Velocity

, and Y = GDP

Therefore, According to the famous e...

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