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The GDP growth rate is 8 percent and inflation is 4 percent. If the velocity of money remains constant, a. what is the c...

The GDP growth rate is 8 percent and inflation is 4 percent. If the velocity of money remains constant, a. what is the change in real money balances? b. what is the change in money supply?

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Answer #1

Use the quantity theory which indicates that

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

Rate of growth of money supply = 8% + 4% - 0% = 12%

Rate of growth of real money balances = rate of growth of money supply - inflation rate = 12% - 4% = 8%

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