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.

Question

BlackTom AI · Accepted Answer

To determine the long-run inflation rate using the quantity theory of money, we start from the relationship MV = PY, where M is the money stock, V is velocity, P is the price level, and Y is real GDP.

In growth terms, this becomes: g_M + g_V = g_P + g_Y, where g_* denotes the growth rate of the respective variable.

From the data provided:
- Money growth rate g_M = 4.7% per year.
- Velocity is constant, so g_V = 0% per year.
- Real GDP per capita growth is 2.1% per year, and population grows at 3.2% per year. Real GDP (not per capita) grows at g_Y = (growth of real GDP per capita) + (population growth) = 2.1% + 3.2% = 5.3% per year.

Plug these into the growth form of the quantity equation:
g_P = g_M + g_V − g_Y = 4.7% + 0% − 5.3% = −0.6%

Therefore, the inflation rate in the long run, according to the quantity theory of money, would be −0.6% per year.

If you were considering alternative scenarios, remember:
- A higher g_M would raise g_P unless offset by a higher g_Y (real growth).
- A positive g_V would increase the left-hand side, requiring a higher g_P or g_Y to balance.
- The key linkage is that long-run inflation depends on money growth minus real output growth (in level terms, adjusted for velocity), with population affecting the total output growth when dealing with real GDP.

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

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