Question

If the money supply grew by 6 percent per year, velocity increased by 1 percent per year, and the inflation rate was 5 percent per year, then real GDP must have _______ by approximately ______.

Answer 1

According to Quantity Theory of Money;

MV = PY

M is the money supply

V is the velocity

P is the price level

Y is the real GDP

% increase in M x % increase in V = % increase in P x % increase in Y

6 x 1 = 5 x % increase in Y

6 = 5 x % increase in Y

% increase in Y = 6/5 = 1.2

So, real GDP increase by approximately 1.2%.