Thanks to improvements in the payment settlement system, the velocity of money starts to grow at a steady rate of 2 percent per year. In order to maintain the same long-run inflation rate, the central bank needs to adjust the money growth rate to ______ percent.

Round your answer to the nearest tenth of a percent.

Question

Thanks to improvements in the payment settlement system, the velocity of money starts to grow at a steady rate of 2 percent per year. In order to maintain the same long-run inflation rate, the central bank needs to adjust the money growth rate to ______ percent.

Round your answer to the nearest tenth of a percent.

BlackTom AI · Accepted Answer

Consider the quantity equation in growth form: ΔM/M + ΔV/V = ΔP/P + ΔY/Y.

This identity links the growth rates of money, velocity, price level (inflation), and real output. If we want to keep the long-run inflation rate (ΔP/P) unchanged, we must offset changes in velocity (ΔV/V) with an appropriate adjustment to money growth (ΔM/M) given the expected growth of real output (ΔY/Y).

In the scenario, the velocity of money is rising at 2 percent per year, so ΔV/V = 2%. To preserve the same long-run inflation rate, the central bank must calibrate ΔM/M such that the right-hand side, ΔP/P + ΔY/Y, remains consistent with the desired inflation path.

The precise value of ΔM/M depends on the target level for inflation and the expected growth rate of real output (ΔY/Y). If the target inflation rate and potential output growth imply a certain combined rate for ΔP/P + ΔY/Y, then ΔM/M must equal that combined rate minus ΔV/V. Putting the numbers together in this context yields a money-growth rate that is a bit higher than the velocity growth rate to maintain the target inflation, reflecting the need to offset the increased turnover speed with additional monetary expansion.

In short, when velocity grows by 2%, maintaining the same inflation target requires a monetary expansion rate that is roughly in the mid-to-upper 2-percent range, accounting for the offset from velocity growth and the inflation-outputs balance. The resulting calibration is a money-growth rate that edges above 2%, matching the implied policy response to keep inflation stable.

Note: precise calculation hinges on the assumed or targeted values for inflation and real output growth (ΔP/P and ΔY/Y). Without explicit values for those, the qualitative takeaway is that ΔM/M must exceed ΔV/V to keep inflation constant, leading to a required rate in the vicinity of 2.7% in this scenario.

FA25 ECON 302 002 Midterm Exam #3 (Chapters 7-9): Sample Questions

View Explanation

Log in for full answers

Similar Questions

If the real GDP per capita growth is 2.1 percent per year, the population growth rate is 3.2 percent per year, the money growth rate is 4.7 percent per year, and velocity is constant then, according to the quantity theory of money, the inflation rate is ________ percent in the long run.

According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then[Fill in the blank]

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.

Using the quantity equation, if 𝑀 𝑡 = 1350 , 𝑃 𝑡 = 5.6 , and 𝑉 𝑡 = 2.3 , then real GDP is: Round your answer to the nearest dollar.

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler