If the quantity of money rose 10%, velocity was unchanged, and output rose 6%, w
ID: 1179872 • Letter: I
Question
If the quantity of money rose 10%, velocity was unchanged, and output rose 6%, what would be the inflation rate, according to the equation of exchange?
Equation given: (Quantity of Money) * (It's velocity) = (Price level) * (Output) or ((QM) * V = P * Q)
Thats the question I need help with, however please walk me through how you actually apply those numbers to the equation so solve for the answer. My text seems to be very vague on the application besides for just giving us the equation needed.
Explanation / Answer
originally equation was MV=PQ
now when the quantity of money rises M becomes 1.1M and when output rises Q becomes 1.06Q so for equilibrium in the new system the price level is calculated by 1.1M*V=(P')*1.06Q
so P' is equal to 1.1P/1.06=1.037 hence the new price is 3.7 % more than the prvious one .So the inflation rate is 3.7%.