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Suppose the velocity of circulation (V) is constant. Annual growth rate of real GDP is 5%. The money supply grows by 14% per year. Use the quantity theory of money to calculate the inflation rate.
My solution:
Given M: 14%, V: Constant, Y: 5%, P: ?
M * V = P * Y
14 * V = P * 5
P = 14/5, am I right?
If not, could you please lead me to the right answer..thanks
M * V = P * Y is not in a form of growth rate, so it needs to be changed into
ΔM + ΔV = ΔP + ΔY Because V is constant, then
14 + 0 = ΔP + 5
ΔP = 9%
ΔP = Change in price = inflation
