Suppose the full-employment level of real GDP is increasing at a rate of 3% per period...
Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 4% rate. What will happen to the long-run inflation rate, assuming constant velocity?
Homework Answers
The formula is:-
MV=PY
where M=money supply
V=velocity
P=price level
Y = real GDP
Assuming constant velocity
1.04MV=1.03PY
P = 1.04/1.03
P = 1.00970
So, inflation rate will be 0.97% or 1%
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