Statistics Solutions

[Solution] Suppose that in the U.S., the income velocity of money (V) is constant. Suppose, too, that every year real GDP (Y) grows by 2 percent and the supply

Question: Suppose that in the U.S., the income velocity of money (V) is constant. Suppose, too, that every year real GDP (Y) grows by 2 percent and the supply of money (M) grows by 6 percent.

  1. According to the quantity theory of money, what will be the growth rate of nominal GDP = P×Y?
  2. What will be the inflation rate?
  3. If the central bank wants the inflation rate to be 0%, what money supply growth rate (i.e. - %ΔM per year) should it set?

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