Suppose the economy's velocity is constant and real output grows at an average rate of 4 percent per year.What would be the result of a 4 percent average rate of growth in the money supply?
A) a constant price level
B) a constant real GDP
C) a rapidly increasing price level
D) a slowly increasing price level

Question

Suppose the economy's velocity is constant and real output grows at an average rate of 4 percent per year.What would be the result of a 4 percent average rate of growth in the money supply?  
A) a constant price level 
B) a constant real GDP 
C) a rapidly increasing price level 
D) a slowly increasing price level

Quizplus · Accepted Answer

With a constant velocity and real output growing at 4 percent per year, a 4 percent growth in the money supply would lead to a constant price level, according to the Quantity Theory of Money. This theory posits that if the money supply grows at the same rate as real GDP, the overall price level will remain stable.

Suppose the Economy's Velocity Is Constant and Real Output Grows