According to the quantity theory of money, what must the growth rate of the money supply be given the following information? The growth rate of real GDP is 1.0%. The growth rate of nominal GDP is 5.2%. The nominal interest rate is 5.4%. The real interest rate is 1.2%. The money supply (M2) is $11 comma 438 (in billions) According to the quantity theory of money, the growth rate of the money supply must be nothing%. (Round your answer to the nearest tenth.)

5.2%

Explanation:

Given the following ;

Growth rate of real GDP = 1.0%

Growth rate of nominal GDP = 5.2%

Nominal interest rate = 5.4%

Real interest rate = 1.2%

Money supply (M2) = $11,438 billion

According to the quantity theory of money;

M + V = P + Y

Where,

M = growth rate of money supply

V = growth rate of velocity

P = inflation rate

Y = growth rate of real output or GDP

Where inflation rate is the difference between nominal interest rate and real interest rate

Inflation rate(P) = 5.4% - 1.2% = 4.2%

Growth rate of velocity is assumed to be constant according to the quantity theory of money. Therefore change in growth velocity of money = 0.

Then growth rate in money supply is the sum of inflation growth rate and the growth rate of real gross domestic product.

Now we have,

M = P + Y

M = 4.2% + 1.0% = 5.2%

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