Suppose the growth rate of real GDP is 2 the nominal interes

Suppose the growth rate of real GDP is 2%, the nominal interest rate is 1.9% and the real interest rate is 0.6%. According to the quantity theory of money, what is the growth rate of money supply? 1.3% 2.6% 3.3% 3.9%

Solution

inflation= nominal interest rate-real interest rate=1.3%

nominal gdp=real gdp*gdp deflator(or price level)= 2*1.3=2.6%

M=PY. so M=nominal gdp=2.6%

M=money supply, P=price level, Y=real gdp