  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%

Step 1

Assume that,

P = Inflation rate / Price level

M = Money supply,

V = Velocity

, and Y = GDP

Therefore, According to the famous e...

Want to see the full answer?

See Solution

Want to see this answer and more?

Our solutions are written by experts, many with advanced degrees, and available 24/7

See Solution
Tagged in 