Question

consider an economy where the money supply is growing at 7 percent per year and velocity is constant. which of the following statements about real gdp growth and the inflation rate could be true? a) real gdp is growing at 9 percent and inflation is 2 percent. b) real gdp is growing at 2 percent and inflation is 5 percent. c) real gdp is growing at 7 percent and inflation is 7 percent. d) real gdp is growing at 2 percent and inflation is 9 percent.

Answer 1

The correct response is option (b), meaning that real GDP is rising at a rate of 2% and inflation is at a rate of 5%.

What connection exists between the equation of exchange and the velocity of money?

According to the equation of exchange, nominal GDP is equal to the money supply M times its velocity V. The frequency with which the money supply is used to purchase the commodities and services that make up GDP over a specific time period is known as velocity.

What happens when the money supply rises and the velocity remains constant?

According to this equation, the price level (P) must rise to make up the gap if the money supply (M) grows more quickly than actual economic output (Q), holding the money velocity constant.

How can the supply and velocity of money be used to calculate inflation?

Money supply multiplied by money velocity results in real GDP. Money supply growth rate plus money velocity growth rate equals inflation rate plus output growth rate. We made use of the fact that the inflation rate is, by definition, equal to the rate at which the price level is growing.

Learn more about money velocity: https://brainly.com/question/13914618

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