Suppose a country has a money demand function ( M/P )^d = kY , where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 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.
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Suppose a country has a money demand function ( M/P )^d = kY , where k is a constant parameter. The...
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