Assume we know that over the last 5 years, the velocity of M2 has been decreasing by 1% per year. Meanwhile, inflation has been constant at 2% per year, and real GDP has increased by 4% per year. According to the Quantity Theory of Money, we can conclude that: A. Money supply has grown by about 1% per year. B. Money supply has grown by about 3% per year. C. Money supply has grown by about 5% per year. D. Money supply has grown by about 7% per year. E. None of the above answers are correct.

Assume we know that over the last 5 years, the velocity of M2 has been decreasing by 1% per year. Meanwhile, inflation has been constant at 2% per year, and real GDP has increased by 4% per year. According to the Quantity Theory of Money, we can conclude that: A. Money supply has grown by about 1% per year. B. Money supply has grown by about 3% per year. C. Money supply has grown by about 5% per year. D. Money supply has grown by about 7% per year. E. None of the above answers are correct.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose you have the following monetary asset information:Cash in circulation: $300bDemand deposits: $400bTraveler’s checks: $50bSaving accounts: $2000bMoney Market Mutual Funds: $1000bShort term time deposits: $500ba. Calculate M1 and M2.b. Recall that the quantity theory of money states that MV = PT. If the velocity ofmoney is presumed fairly constant, how is it helpful to measure the money supply(whether M1 and M2) for purposes of predicting inflation?
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