If the growth rate of real GDP is 3.5 percent per year, the money supply grows at a rate of 7 percent, and the velocity is constant, using the quantity theory, the inflation rate is ______ percent.

Round your answer to the nearest hundredth of a percent.

Question

If the growth rate of real GDP is 3.5 percent per year, the money supply grows at a rate of 7 percent, and the velocity is constant, using the quantity theory, the inflation rate is ______ percent.

Round your answer to the nearest hundredth of a percent.

BlackTom AI · Accepted Answer

To analyze this question, I start from the quantity theory of money, which in growth form is: %ΔM + %ΔV = %ΔP + %ΔY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP.

- Step 1: Velocity growth is given as constant, so %ΔV = 0. This removes velocity change from the equation.
- Step 2: The growth rate of real GDP (%ΔY) is 3.5%.
- Step 3: The money supply grows at 7% per year, so %ΔM = 7%.

With %ΔV = 0, the equation simplifies to 7% = %ΔP + 3.5%, which implies %ΔP = 7% − 3.5% = 3.5%.

- Step 4: Therefore, the inflation rate, which is measured by the growth rate of the price level (%ΔP), is 3.5%. Since the problem asks for the answer rounded to the nearest hundredth of a percent, we express this as 3.50%.

Note: If velocity were not constant (i.e., if %ΔV ≠ 0), the inflation rate would be affected by changes in velocity as well, via %ΔP = %ΔM + %ΔV − %ΔY. However, given the problem’s condition of constant velocity, the calculation hinges solely on the difference between money growth and real output growth.

FA25 ECON 302 002 Homework #6 (Inflation)

If the growth rate of real GDP is 3.5 percent per year, the money supply grows at a rate of 7 percent, and the velocity is constant, using the quantity theory, the inflation rate is ______ percent. Round your answer to the nearest hundredth of a percent.

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