Question
In section 8.5 of the textbook on the fiscal causes of high inflation, the government's budget constraint is given byG=T+B+M G=T+B+M. G is government expenditures,
In section 8.5 of the textbook on the fiscal causes of high inflation, the government's budget constraint is given byG=T+B+M
G=T+B+M.
Gis government expenditures,Tis total tax revenue,B
Bis the net issuance of bonds (i.e. new bonds issued minus redemptions of old bonds), andM
Mis the change in the money supply.
Suppose the budget deficit(G - T)is 6% of GDP (denoted byY) and the net issuance of bonds is equal to 4.5% of GDP. If the money supply equals GDP (i.e.M = Y), then the growth rate of the money supply must be __________ percent. (Round to the nearest tenth.)
(Hint: Divide the budget constraint by GDP and rearrange terms. Multiply and divide byMin order to get an expression that includes the growth rate ofM, i.e.M/M)
GivenM/Mand assuming that real GDP grows at a rate of 2 percent per year, you know that annual inflation is ______ percent. (You can assume that the velocity of money is constant.)
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