Question

For a country A, the GDP growth rate is 8 percent and inflation is 4 percent. If the velocity of money remains constant, what is the change in real money balances

Answer 1

Answer:

The change in the real money balance is 12%

Explanation:

As per gievn data

GDP growth rate = 8%

Inflation = 4%

The real money change is as follow

Equation

Delta M + Delta V = Delta P + Delta Y

Where

Delta M = Real money change = ?

Delta V = Change in velocity = 0

Delta P = Inflation rate = 4%

Delta Y = GDP growth rate = 8%

Placing values in the above equation

Delta M + 0 = 4% + 8%

Delta M = 12%

Hence the money balance will increase by 12%.