Make use of the quantity equation to answer the following problem. If the Fed increases the...
Make use of the quantity equation to answer the following problem. If the Fed increases the money supply by 6%, economic growth is 2%, and inflation is 2%, what is happening to the velocity of money? Be specific.
Homework Answers
Answer : The formula to obtain the growth rate of velocity is,
Money supply growth rate + Velocity growth rate = Inflation rate + Economic growth rate
=> 6% + Velocity growth rate = 2% + 2%
=> Velocity growth rate = 2% + 2% - 6%
=> Velocity growth rate = - 2%
Therefore, here the velocity of money decreases by 2%.
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