Question

30-3. At the end of 2009 the relevant money-supply curve was the one labeled MS1. At the end of 2010 the relevant money-supply curve was the one labeled MS2. Assuming the economy is always in equilibrium, what was the economy’s approximate inflation rate for 2010?

Answer 1

Answer: c. 50%

Explanation:

I included a picture of the question to show you the rest of it as it is in graph form.

We can use the Quantity Theory if money to answer this.

It holds that MV = PY

M = quantity of money,

P = the price level,

Y = total output

V = velocity,

According to the theory, a change in M would lead to a change in P if V and Y are held constant.

Inflation would therefore be the change in M in percent.

= 15000 - 10 000 / 10 000

= 0.50 * 100

= 50%

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