The concept of the 'velocity of circulation of money is key to understanding how money relates to inflation. Particularly, when the velocity of circulation of money is constant, we can use growth in the money supply as an indicator of inflation. (Ref: Notes 7-1, 7-2, 7-31 a) What do we mean by the "velocity of circulation of money? Explain briefly in simple terms. b) Using the equation of exchange in growth terms (also known as the quantity theory of money in growth terms), if the velocity of circulation constant, real GDP growth rate is 2%, and the money supply growth is 8%, what is the growth in the price level inflation)? c) Repeat b), but with a real GDP growth rate of 5% and a money supply growth rate of 20% d) Why is inflation generally high when governments print a lot of money? Explain in terms of the quantity theory of money. d) What is meant by the term money neutrality?
