Question

1. It is sometimes suggested that the Federal Reserve should try to achieve zero inflation. Assume that velocity is constant. True or False?
2. In order to achieve this zero-inflation goal, the rate of money growth must equal zero. True or false?

Answer 1

Answer:

False

Explanation:

This relates to quantity equation of money.

Let M = Quantity of Money.

V = Velocity

Nominal Value = P * Y

The relationship between the above is: M×V=P×Y .

Where Inflation, P is constant.

The constant velocity, V will reduce the inflation to 0 which will also require that the variables M and Y be proportionally related.

So, the money growth rate must equal the growth rate of real output