Question

Let the rate of inflation in an economy be 4.2%, the growth rate of velocity of money be 2%, and the growth rate of real GDP be 6%. According to Milton Friedman’s ‘k’ percent rule, the rate of growth of money supply for maintaining stable prices will be _________ (round off to one decimal place).

Hint:

Milton Friedman’s 'k' percent rule helps determine the money supply growth rate by considering inflation, real GDP growth, and velocity of money.

Answer 1

Correct Answer: 4

According to Milton Friedman’s 'k' percent rule, the rate of growth of money supply is given by the formula: \[ \text{Growth rate of money supply} = \text{Inflation rate} + \text{Growth rate of real GDP} - \text{Growth rate of velocity of money} \] Substitute the given values: \[ \text{Growth rate of money supply} = 4.2% + 6% - 2% = 8.2% \] Thus, the rate of growth of money supply for maintaining stable prices is \( 8.2% \).