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26 Aug 2018
Suppose a country has a money demand function M/P = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 5 percent per year.
a. What is the average inflation rate?
b. How would inflation be different if real income growth were higher? Explain.
c. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.
Suppose a country has a money demand function M/P = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 5 percent per year.
a. What is the average inflation rate?
b. How would inflation be different if real income growth were higher? Explain.
c. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.
Trinidad TremblayLv2
27 Aug 2018
