The quantity of money grows at a rate of 14percent ayear, potential GDP grows at
7 percent a year, and the velocity of circulation increases at a rate of 2 percent per year increases at a rate of 2 percent per year.
Calculate the inflation rate in the long run.
The inflation rate in the long run is percent a year.
To calculate the inflation rate in the long run, we need to consider the Quantity Theory of Money, which states that the inflation rate is equal to the growth rate of the money supply minus the combined growth rate of real GDP and velocity.
In this case, the growth rate of the money supply is given as 14 percent per year. The growth rate of potential GDP is given as 7 percent per year, and the growth rate of velocity is given as 2 percent per year.
Thus, the combined growth rate of real GDP and velocity is 7 percent + 2 percent = 9 percent per year.
Therefore, the inflation rate in the long run would be the difference between the growth rate of the money supply and the combined growth rate of real GDP and velocity, which is 14 percent - 9 percent = 5 percent per year.
Hence, the inflation rate in the long run would be 5 percent per year.