Suppose the money supply grew at an average annual rate of 8%,velocity was constant,the nominal interest rate averaged 9%,and output grew at an average annual rate of 3%.According to the quantity theory,
A)inflation averaged 8% per year and the real interest rate was 9%.
B)inflation averaged 11% per year and the real interest rate was 17%.
C)inflation averaged 5% per year and the real interest rate was 4%.
D)inflation averaged 1% per year and the real interest rate was 6%.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, inflation rate = money supply growth rate - output growth rate. Thus, inflation = 8% - 3% = 5%. The real interest rate is nominal interest rate - inflation rate, so real interest rate = 9% - 5% = 4%.

Suppose the Money Supply Grew at an Average Annual Rate