Question

Suppose real GDP is forecasted to grow by 2.78 %, the velocity of money has been stable, and the Fed announces an inflation target of 3.70 %. What is the largest money growth rate the Fed could implement and still achieve its inflation target

Answer 1

Answer: 6.48%

Explanation:

This can be solved using the Quantity theory of money;

MV = PY

When dealing with changes, formula changes to;

% change in Money Supply + %change in velocity = %change in price + %change in real GDP

Velocity has been stable so will be zero.

change in money supply = 3.70% + 2.78%

= 6.48%