Assume that demand for money is constant and inelastic (does not depend on nominal interest rates). What should be the growth rate of the money supply to keep inflation at 0%?&qu…

Question

Assume that demand for money is constant and inelastic (does not depend on nominal interest rates). What should be the growth rate of the money supply to keep inflation at 0%?""

Answer 1

The growth rate of money supply is to be 10% in order to keep inflation at 0%.

Step-by-step explanation:

As the first part of the question was missing, the complete question is as attached with the solution.

From the given data

Inflation=Increase in prices=0%

Growth Rate=10% (As given in the complete question attached with the solution)

Now as per the Quantity Theory of Money

Money Supply x Velocity of Money Supply= Price x Output

In terms of percentage the formula is given as

%age change in Money Supply +%age change in Velocity of Money Supply= %age change in Price + %age change in Output

Here

M=%age change in Money Supply which is to be calculated

V=%age change in Velocity of Money Supply which is 0 as the velocity is constant

P=%age change in Price which is also termed as inflation and is given as 0%.

O=%age change in Output which is given as 10%

So solving the equation gives

M+V=P+O

M+0=0+10%

So the growth rate of money supply is to be 10% in order to keep inflation at 0%.