(Answered) Suppose that in the us the income velocity of money v is

Management Studies

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.

a. According to the quantity theory of money, what will be the growth rate of nominal GDP= PxY?

b. What will be the inflation rate?

c. If the central bank wants the inflation rate to be 0%, what money supply growth rate (i.e. -%^M per year) should it set?

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