Question

Suppose a country has a money demand function (M/P)d =kY where K is a constant parameter the money supply grows by 12% per year and real income grows by 4% per year what is the average inflation rate

Answer 1

Answer:

12%-4%=8% B. If real income was higher, the inflation level would decrease subject to the consumers budget constraints. In other words, they will make the same amount of money but their purchasing power per dollar will increase. C. In this case, an increase in money would cause the inflation rate to increase. If we think about the past and events such as hyperinflation, look at what the cause was.