The table below shows data for Japan.
$$\begin{array} { | l | l | l | }
\hline & 2008 & 2009 \
\hline \text { M1 growth rate } & 0.7 & 0.9 \
\hline \text { Inflation rate } & 0.4 & - 0.3 \
\hline
\end{array}$$
Assuming the rate of velocity change is constant, real GDP
A) grew by -1.2 percent in 2009.
B) grew by 1.1 percent in 2008.
C) grew by 0.3 percent in 2008.
D) grew by 0.9 percent in 2009.

Question

The table below shows data for Japan.
$$\begin{array} { | l | l | l | } 
\hline & 2008 & 2009 \
\hline \text { M1 growth rate } & 0.7 & 0.9 \
\hline \text { Inflation rate } & 0.4 & - 0.3 \
\hline
\end{array}$$
Assuming the rate of velocity change is constant, real GDP
A) grew by -1.2 percent in 2009.
B) grew by 1.1 percent in 2008.
C) grew by 0.3 percent in 2008.
D) grew by 0.9 percent in 2009.

Quizplus · Accepted Answer

Using the equation of exchange, MV = PY, where M is the money supply growth rate (M1 growth rate), V is the velocity of money, P is the inflation rate, and Y is the real GDP growth rate. Assuming constant velocity, the real GDP growth rate can be approximated by subtracting the inflation rate from the M1 growth rate. For 2008, this is 0.7% - 0.4% = 0.3%.

The Table Below Shows Data for Japan Assuming the Rate of Velocity Change Is Constant, Real GDP