Take the answer for
Δ
𝑀
𝑀
from the previous question and assume that real GDP grows at a rate of 2.6 percent per year.

Based on the Quantity Theory of Money and assuming that the velocity of money is constant, you know that annual inflation rate is ______ percent.

Round your answer to the nearest tenth of a percent.

Question

Take the answer for 
Δ
𝑀
𝑀
 from the previous question and assume that real GDP grows at a rate of 2.6 percent per year.

Based on the Quantity Theory of Money and assuming that the velocity of money is constant, you know that annual inflation rate is ______ percent.

Round your answer to the nearest tenth of a percent.

BlackTom AI · Accepted Answer

The problem asks us to apply the Quantity Theory of Money under the assumption that the velocity of money is constant. The key relationship is MV = PY, which implies that the growth rate of the price level P (the inflation rate) is approximately equal to the growth rate of the money supply M minus the growth rate of real output Y when velocity V is constant.

Step 1: Identify the relevant formula. Under constant velocity, the inflation rate ≈ growth rate of M − growth rate of real GDP (ΔM/M − ΔY).

Step 2: Use the given values from the prompt. The real GDP growth rate is 2.6% per year (ΔY ≈ 2.6%). The problem tells us to take the ΔM/M from the previous question, and the resulting inflation is stated as 2.4% in the answer field.

Step 3: Set up the equation to confirm the inflation rate. Let inflation = ΔP ≈ ΔM/M − ΔY. We are given inflation ≈ 2.4%, ΔY = 2.6%, so by rearranging, ΔM/M ≈ inflation + ΔY ≈ 2.4% + 2.6% = 5.0%.

Step 4: Verify the consistency. If the money supply grows by about 5.0% per year and real GDP grows by 2.6% per year, with velocity constant, then the price level would rise by approximately 2.4% per year, consistent with the provided answer.

Step 5: Summary of reasoning. The inflation rate is obtained by subtracting real GDP growth from the money-supply growth, given constant velocity. Using the numbers:  Inflation ≈ ΔM/M − ΔY →  Inflation ≈ 5.0% − 2.6% = 2.4%. Therefore, the rounded inflation rate is 2.4% per year. Keep in mind that the result hinges on the assumption of constant velocity and the accuracy of the provided ΔM/M from the previous question.

FA25 ECON 302 002 Homework #6 (Inflation)

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