Question

You are the head of the central bank and you want to maintain 2 percent long-run inflation, using the quantity theory of money. If the real GDP growth is 4 percent and velocity is constant, you suggest

Answer 1

Answer:

growth rate of money be to the inflation target = 6.1%

Explanation:

given data

long-run inflation = 2%

real GDP growth = 4 percent

to find out

growth rate of money

solution

we get here growth rate g that is get by given formula that is

$\tex{1.02\times P = [(1 + g)\times M\times V]}{(1.04\times Y)}}$      .........................1

here we get growth rate g

1.02 = $\frac{(1 + g)}{1.04}$      

solve it we get

growth rate  = 6.1%  

so that growth rate of money be to the inflation target = 6.1