Question

Statistics

Posted 2 months ago

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According to the quantity theory of money, which of the following best describes what determines the rate of inflation in the long run?
Choose 1 answer:
(A) The rate of change of the velocity of money
(B) The growth of the price level
(c) The growth of real GDP per capita
(D) The rate of growth of the money supply
(E) The rate of inflation is constant in the long run
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Answer from Sia

Posted 2 months ago

Solution by Steps

step 1

According to the quantity theory of money, the equation of exchange is given by $MV = PY$, where $M$ is the money supply, $V$ is the velocity of money, $P$ is the price level, and $Y$ is the real GDP

step 2

In the long run, the velocity of money $V$ and real GDP $Y$ are assumed to be constant. Therefore, any change in the money supply $M$ will directly affect the price level $P$

step 3

The rate of inflation is determined by the rate of growth of the money supply $M$ because $V$ and $Y$ are constant

D

Key Concept

Rate of growth of the money supply

Explanation

In the long run, the rate of inflation is primarily determined by the rate of growth of the money supply, assuming the velocity of money and real GDP are constant.

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