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14 May, 14:47

1. It is sometimes suggested that the Federal Reserve should try to achieve zero inflation. Assume that velocity is constant. True or False?

2. In order to achieve this zero-inflation goal, the rate of money growth must equal zero. True or false?

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  1. 14 May, 16:33
    0
    False

    Explanation:

    This relates to quantity equation of money.

    Let M = Quantity of Money.

    V = Velocity

    Nominal Value = P * Y

    The relationship between the above is: M*V=P*Y.

    Where Inflation, P is constant.

    The constant velocity, V will reduce the inflation to 0 which will also require that the variables M and Y be proportionally related.

    So, the money growth rate must equal the growth rate of real output
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