Suppose That Real GDP Grows by 3 Percent a Year

question 3

Multiple Choice

Suppose that real GDP grows by 3 percent a year, the quantity of money grows 5 percent a year, and velocity does not change. In the long run, the inflation rate equals

• A)8 percent.
• B)10 percent.
• C)3 percent.
• D)5 percent.
• E)2 percent.

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Definitions:

Variable Costing

An accounting method that includes only variable production costs in product costs and treats fixed overheads as period costs.

Fixed Manufacturing Overhead

The sum of all regular, non-variable costs involved in manufacturing, including rent, salaries of permanent staff, and maintenance of equipment.

Absorption Costing

An accounting method that includes all manufacturing costs, such as direct materials, direct labor, and both variable and fixed manufacturing overhead, in the cost of a product.

Unit Product Cost

The total cost associated with producing one unit of product, encompassing both fixed and variable costs.