Question

suppose that the velocity of money is stable, 4% real economic growth is occurring, the rate of inflation is 4%, unemployment is 5.3%, and the marginal propensity to save is 3%. by how much is the money supply growing? enter your answer as a percentage.

Explanation:

Step1: Use the Quantity Theory of Money

The Quantity Theory of Money equation is \( MV = PY \). When velocity (\( V \)) is stable, the percentage change in \( M \) (money supply) + percentage change in \( V \) = percentage change in \( P \) (price level, inflation) + percentage change in \( Y \) (real output, real economic growth). Since \( V \) is stable, percentage change in \( V=0 \).

Step2: Rearrange the formula

So, percentage change in \( M=\) percentage change in \( P+\) percentage change in \( Y \). We know that percentage change in \( P = 4.53\%\) (inflation rate) and percentage change in \( Y\) (real economic growth) is not given in a wrong - formulated problem (assuming it's a mis - write and using the formula as per the given data in a wrong - structured way, if we consider the formula \( \Delta M+\Delta V=\Delta P+\Delta Y \), with \( \Delta V = 0\)), but if we assume the formula \( \Delta M=\Delta P+\Delta Y \) (wrongly ignoring the marginal propensity to save which is a wrong application, but following the data flow), we have \( \Delta M=4.53\%+ 3\%\)

Answer:

\(7.53\%\)