Let all workers sign three-year contracts with guaranteed 10 percent wage increases built in for each year. Let GDP match potential GDP to begin with and let potential GDP grow at 3 percent per year. To maintain GDP at potential, the money supply would have to grow at an annual rate of
A) 3 percent because price inflation under the markup model is 3 percent.
B) 7 percent because price inflation under the markup model is 7 percent.
C) 10 percent because price inflation under the markup model is 10 percent.
D) 13 percent because price inflation under the markup model is 10 percent.
E) 13 percent because price inflation under the markup is 13 percent.

Question

Quizplus · Accepted Answer

To maintain GDP at potential, the money supply must grow at the rate of nominal GDP growth, which is the sum of real GDP growth (3%) and wage-driven inflation (10%), totaling 13%.

Let All Workers Sign Three-Year Contracts with Guaranteed 10 Percent