Question

According to the dynamic version of the equation of exchange (as presented in the PowerPoint slides for Chapter 12), what will the rate of inflation be if real output grows 3% a year while the money supply grows 9% a year, assuming velocity is constant?

Answer 1

Answer:

6%

Explanation:

Based on the equation of exchange, the inflation rate can be determined by taking the difference between the rate of wage growth and the rate of labor productivity. Therefore, in the question above, the inflation rate is 9% - 3% = 6%. This shows that a fast increase in the wage growth rate with a slow increase in the productivity rate will lead to inflation.