Suppose the Economy's Real Output Grows at an Average Rate

question 27

Multiple Choice

Suppose the economy's real output grows at an average rate of 3 percent per year.And suppose there is a 7 percent average rate of growth in the money supply, and velocity is constant.How would the inflation rate be affected?  

• A) The inflation rate would be -4 percent. 
• B) The inflation rate would be 4 percent. 
• C) The inflation rate would be 7 percent. 
• D) The inflation rate would be 10 percent.

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Definitions:

Fiscal Spending

Government expenditures on goods, services, and public works financed by taxes, borrowing, or other resources.

Money Saved

The portion of income that is not spent on consumption but kept aside for future use, emergencies, or investments.

Stock Variable

A quantifiable amount at a particular point in time, such as the amount of money in circulation.

Government Bonds

Debt securities issued by a government to finance its expenditure, promising to pay a specified interest rate and to return the principal at maturity.