- CFA Exams
- CFA Level I Exam
- Study Session 5. Economics (2)
- Reading 16. Monetary and Fiscal Policy
- Subject 1. What is Money?

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**CFA Practice Question**

If the real growth rate of the economy is 3% and the money supply is increasing at 4%, given that the velocity of money is constant, ______

A. the rate of inflation will equal 1%.

B. prices will decline at the rate of 1%.

C. nominal interest rates will decline by 1%.

**Explanation:**According to the quantity theory of money, if the velocity of money does not change, rate of inflation = rate of money supply growth - real growth rate of economy = 4% - 3% = 1%.

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**User Contributed Comments**
4

User |
Comment |
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gill15 |
I dont know why I`m confused about this. But does this have to do with the Fischer equation or this seperate.... I understand the logic somewhat but dont understand where the equation is from... |

Shaan23 |
I dont understand this either. Where is that equation from? |

jjhigdon |
Basic Fischer Equasion is MxV=PxY, but stated in terms of year /year % Change(delta): %dM + %dV = %dP + %dY. Hence 4% + 0% = %dP + 3%. |

monikat |
thx jjhigdon, well explained |