Question

QUESTION 12 5 points Save Answer Suppose that Japan's Central Bank announces it wants to target an inflation rate of at least 2%, and that real GDP growth in the economy is 1%. Assume that velocity is constant. Then money growth must be at least 4% 2% None of the above/below OOO 3% 1% QUESTION 13 5 points Save Answer Suppose we construct the CPI and the GDP deflator using the same type of goods. Which of the following is true: The CPI and GDP deflator may both overstate or understate inflation, it depends on the case considered Both the CPI and the GDP deflator overstate inflation None of the above/below The CPI overstates inflation, the GDP deflator understates inflation The CPI understates inflation, the GDP deflator overstates inflation

QUESTION 12

1. Suppose that Japan’s Central Bank announces it wants to target an inflation rate of at least 2%, and that real GDP growth in the economy is 1%. Assume that velocity is constant. Then money growth must be at least

   		4%
   		2%
   		None of the above/below
   		3%
   		1%

2. QUESTION 13

3. Suppose we construct the CPI and the GDP deflator using the same type of goods. Which of the following is true:

   		The CPI and GDP deflator may both overstate or understate inflation, it depends on the case considered
   		Both the CPI and the GDP deflator overstate inflation
   		None of the above/below
   		The CPI overstates inflation, the GDP deflator understates inflation
   		The CPI understates inflation, the GDP deflator overstates inflation

Answer 1

12) in terms of percentage the quantity equation can be written as

Rate of inflation + rate of growth of GDP = rate of growth of velocity + rate of growth of money supply

Rate of growth of money supply = rate of inflation + rate of growth of GDP - rate of growth of velocity

= 1% + 2% - 0%

= 3%

Correct choice is 3%

13) The CPI overstates inflation, the GDP deflator understates inflation. This is because CPI uses only a fixed basket of goods and services therefore it measures the changes in the prices of only those goods and services. GDP deflator measures the changes in output only keeping the price level unchanged. Due to this reason none of them depicts the true picture of inflation.