During the 1970's,U.S.inflation averaged 7% each year and real GDP increased.Holding velocity constant and using the quantity equation,we conclude that
A)money growth must have been greater than the growth of real income.
B)money growth must have been less than the growth of real income.
C)prices fell during the 1970's.
D)output fell during the 1970's.

Question

Quizplus · Accepted Answer

According to the quantity equation, MV = PQ, where M is the money supply, V is velocity (assumed constant), P is the price level and Q is real output. Rearranging this equation to solve for P, we get P = MV/Q. Given that real output (Q) increased during the 1970s and velocity was assumed to be constant, the only way that inflation (P) could have averaged 7% each year is if money growth (M) exceeded the growth of real income (Q). Therefore, the correct answer is A.