You are the head of the central bank and you want to maintain 2 percent long-run inflation, using the quantity theory of money. If the real GDP growth is 4 percent and velocity is constant, what must the growth rate of money be to the inflation target?

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28 June, 04:48

You are the head of the central bank and you want to maintain 2 percent long-run inflation, using the quantity theory of money. If the real GDP growth is 4 percent and velocity is constant, what must the growth rate of money be to the inflation target?

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Isiah Carson · Answer 1

The growth rate of money be to the inflation target must be 6.1%

Explanation:

1.02*P = [ (1 + g) * M*V] / (1.04*Y)

1.02*P = [ (1 + g) / 1.04]*P

1 + g = (1.04) (1.02)

g = 6.1%

Therefore, The growth rate of money be to the inflation target must be 6.1%