5. Inflation and the quantity theory: Suppose velocity is constant, the growth rate of real GDP is 3% per year, and the growth rate of money is 5% per year. Calculate the long-run rate of inflation according to the quantity theory in each of the following cases: 1. What is the rate of inflation in this baseline case? 2. Suppose the growth rate of money rises to 10% per year. 3. Suppose the growth rate of money rises to 100% per year. 4. Back to the baseline case, suppose real GDP growth rises to 5% per year. 5. What if real GDP growth falls to 2% per year? 6. Return to the baseline case and suppose the velocity of money rises at 1% per year. What happens to inflation in this case? Why might velocity change in this fashion?
5. Inflation and the quantity theory: Suppose velocity is constant, the growth rate of real GDP is 3% per year, and the growth rate of money is 5% per year. Calculate the long-run rate of inflation according to the quantity theory in each of the following cases: 1. What is the rate of inflation in this baseline case? 2. Suppose the growth rate of money rises to 10% per year. 3. Suppose the growth rate of money rises to 100% per year. 4. Back to the baseline case, suppose real GDP growth rises to 5% per year. 5. What if real GDP growth falls to 2% per year? 6. Return to the baseline case and suppose the velocity of money rises at 1% per year. What happens to inflation in this case? Why might velocity change in this fashion?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:5. Inflation and the quantity theory: Suppose velocity is constant, the growth rate of real GDP is 3% per year, and the growth rate of money is 5% per year. Calculate the long-run rate of inflation according to the
quantity theory in each of the following cases:
1. What is the rate of inflation in this baseline case?
2. Suppose the growth rate of money rises to 10% per year.
3. Suppose the growth rate of money rises to 100% per year.
4. Back to the baseline case, suppose real GDP growth rises to 5% per year.
5. What if real GDP growth falls to 2% per year?
6. Return to the baseline case and suppose the velocity of money rises at 1% per year. What happens to inflation in this case? Why might velocity change in this fashion?
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