Suppose the velocity of circulation increases by 2 percent and potential GDP grows by 2 percent. The trend inflation rate will equal zero if the quantity of money grows by
A) 0 percent.
B) 2 percent.
C) 4 percent.
D) -2 percent.

Question

Quizplus · Accepted Answer

The quantity of money must grow at the same rate as the velocity of circulation and potential GDP combined in order to keep the trend inflation rate at zero.

Suppose the Velocity of Circulation Increases by 2 Percent and Potential