If real GDP grows by 3 percent, the velocity of circulation does not change, and the quantity of money grows by 5 percent, then in the long run the inflation rate is
A)3 percent.
B)2 percent.
C)8 percent.
D)-5 percent.
E)-2 percent.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the inflation rate is approximately the growth rate of the money supply minus the growth rate of real GDP. Here, 5% (money growth) - 3% (real GDP growth) = 2% inflation rate.

If Real GDP Grows by 3 Percent, the Velocity of Circulation