CFA Practice Question

There are 341 practice questions for this study session.

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%.

User Contributed Comments 4

User Comment
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
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