In monetarist theory, if velocity is constant, long-run inflation is determined mainly by

• A. Money growth.
• B. Real GDP growth.
• C. Fiscal policy.
• D. The stock of government debt.

Answer: (A)

In monetarist thinking, if velocity is constant, the amount of money in circulation directly drives the price level over time. The basic idea is the quantity of money times how fast it circulates equals nominal output (the price level times real output). When velocity doesn’t change, any growth in the money supply must show up as growth in prices, not in real output, in the long run. So the inflation rate—the rate at which prices rise—is determined mainly by how fast the money supply is growing, relative to the growth of real output.

To see it intuitively: if you keep the economy’s real production capacity roughly the same and keep printing more money, prices rise to balance the extra money chasing the same amount of goods. If real GDP grows, that can offset some inflation, but in the long run real growth is driven by real factors, while money growth largely sets the price level. That’s why money growth is the primary determinant of long-run inflation in this framework.

Real GDP growth influences the quantity of goods, not the price level to the same direct extent, so it’s not the main driver of long-run inflation under constant velocity. Fiscal policy or the stock of government debt can affect inflation only indirectly through effects on the money supply, not as the direct determinant in this view.