Chapter 35, Problem 1FT

Sub part (a):

To determine

The inflation in the economy.

Answer to Problem 1FT

The inflation is 9 percent.

Explanation of Solution

It is given that the money supply in the economy increases by 10 percent. It is also given that the velocity of money is 3 percent and the real growth in the economy is 4 percent. Thus, the inflation in the economy can be calculated by subtracting the real growth rate from the summation of the increase in the money supply and velocity as follows:

$\begin{array}{c}\text{Inflation}=\left(\text{Increase in money supply}+\text{Velocity}\right)-\text{Real growth rate}\\ =\left(10+3\right)-4\\ =9\end{array}$

Thus, the inflation in the economy is 9 percent.

Economics Concept Introduction

Concept introduction:

Inflation: The inflation is the abnormal rise in the general price level in the economy.

Sub part (b):

To determine

The inflation and the real growth in the economy.

Answer to Problem 1FT

The inflation is 6 percent and real growth rate is 4 percent.

Explanation of Solution

It is given that the money supply in the economy increases by 10 percent. It is also given that the velocity of money falls to 0 percent. The real growth in the economy is unchanged and thus, it will remain as 4 percent. Thus, the inflation in the economy can be calculated by subtracting the real growth rate from the increase in the money supply as follows:

$\begin{array}{c}\text{Inflation}=\text{Increase in money supply}-\text{Real growth rate}\\ =10-4\\ =6\end{array}$

Thus, the inflation in the economy is 6 percent and the real growth rate is 4 percent.

Economics Concept Introduction

Concept introduction:

Inflation: The inflation is the abnormal rise in the general price level in the economy.

Sub part (c):

To determine

The inflation in the economy of Pre.

Answer to Problem 1FT

The inflation is 4 percent.

Explanation of Solution

It is given that the money supply in the economy increases by 2 percent. It is also given that the velocity of money increases by 4 percent. The real growth in the economy is given to be 2 percent.

Thus, the inflation in the economy can be calculated by subtracting the real growth rate from the sum of the increase in the money supply and the velocity of money as follows:

$\begin{array}{c}\text{Inflation}=\left(\text{Increase in money supply}+\text{Velocity of money}\right)-\text{Real growth rate}\\ =\left(2+4\right)-2\\ =4\end{array}$

Thus, the inflation in the economy is 4 percent.

Economics Concept Introduction

Concept introduction:

Inflation: The inflation is the abnormal rise in the general price level in the economy.

Sub part (d):

To determine

The inflation and the real growth in the economy of Pre.

Answer to Problem 1FT

The inflation is 8 percent and real growth rate is 2 percent.

Explanation of Solution

It is given that the money supply in the economy increases by 2 percent. Here, there is a change in the velocity of money. The velocity of money increases by 8 percent.

The changes in the velocity of money do not affect the real growth in the economy. Thus, the real growth rate is unchanged and it will remain same as 2 percent. Therefore, the inflation in the economy can be calculated by subtracting the real growth rate from sum of the increase in the money supply and velocity as follows:

$\begin{array}{c}\text{Inflation}=\left(\text{Increase in money supply}+\text{Velocity}\right)-\text{Real growth rate}\\ =\left(2+8\right)-2\\ =8\end{array}$

Thus, the inflation in the economy is 8 percent and the real growth rate is 2 percent.

Economics Concept Introduction

Concept introduction:

Inflation: The inflation is the abnormal rise in the general price level in the economy.

Sub part (e):

To determine

The inflation in the economy of Fri.

Answer to Problem 1FT

Inflation is 0 percent.

Explanation of Solution

The money supply growth rate in the economy is given to be 3 percent. whereas the velocity of money is given as 0 percent. The real growth rate of the economy is given to be 3 percent. Thus, the inflation rate in the economy can be calculated as follows:

$\begin{array}{c}\text{Inflation}=\left(\text{Increase in money supply}+\text{Velocity}\right)-\text{Real growth rate}\\ =\left(3+0\right)-3\\ =0\end{array}$

Thus, the inflation in the economy is 0 percent and it is the rate of inflation which is best according to Milton Friedman.

Economics Concept Introduction

Concept introduction:

Inflation: The inflation is the abnormal rise in the general price level in the economy.

Sub part (f):

To determine

The inflation and the real growth in the economy of Fri.

Answer to Problem 1FT

The inflation is -2 percent and real growth rate is 3 percent.

Explanation of Solution

It is given that the money supply in the economy increases by only 1 percent. It is also given that the velocity of money is 0 percent. The real growth in the economy is unchanged and thus, it will remain as 3 percent. Thus, the inflation in the economy can be calculated by subtracting the real growth rate from the increase in the money supply as follows:

$\begin{array}{c}\text{Inflation}=\text{Increase in money supply}-\text{Real growth rate}\\ =1-3\\ =-2\end{array}$

Thus, the inflation in the economy is -2 percent and the real growth rate is 3 percent.

Economics Concept Introduction

Concept introduction:

Inflation: The inflation is the abnormal rise in the general price level in the economy.