Suppose the money demand function (M/P)d=kY, where the k is constant. If the money supply grows by 9 per cent per year and the real income increases by 5 per cent per year, what about the average inflation rate? If the velocity of money grows by 2%?This is a multi answer question. You can select one or more options as the answer.A.2%B.4%C.14%D.6%

The average inflation rate can be calculated using the Quantity Theory of Money, which states that the money supply times the velocity of money equals the price level times real income (MV = PY).

Given that the money supply (M) grows by 9% per year and the real income (Y) increases by 5% per year, we can substitute these values into the equation.

However, we are also given that the velocity of money (V) grows by 2% per year.

The inflation rate is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In this case, it is represented by the growth rate of the price level (P).

So, we can set up the equation as follows:

(1 + growth rate of M) * (1 + growth rate of V) = (1 + growth rate of P) * (1 + growth rate of Y)

Substituting the given values:

(1 + 0.09) * (1 + 0.02) = (1 + inflation rate) * (1 + 0.05)

Solving for the inflation rate, we get:

1.11 * 1.02 = 1.13 = (1 + inflation rate) * 1.05

Dividing both sides by 1.05, we get:

1.076 = 1 + inflation rate

Subtracting 1 from both sides, we get:

0.076 = inflation rate

Converting this to a percentage, we get an inflation rate of 7.6% per year.

Therefore, none of the options A.2%, B.4%, C.14%, D.6% are correct. The average inflation rate is 7.6% per year.