Determine the countrys initial inflation rate

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Reference no: EM13204349

You are asked to predict the economic future of a country with the following data: The long-run growth rate of potential output is 3% per year, velocity is constant, the money supply grows at a rate of 5% per year. Initially, actual output equals potential output. The nominal interest rate is 3.5%. Prices are sticky in the short run.
The central bank is considering an increase in the money supply growth rate to 7% per year. You are asked to advise them about the economic effects.

a. Determine the country's initial inflation rate and real interest rate.

b. Predict the short-run impact of the central bank's policy change on output, inflation, and real interest rate, and the nominal interest rate. Illustrate your answers with output/inflation and output/interest rate diagrams.

c. Predict the country's inflation rate, real interest rate, and nominal interest rate in the long run, after the money growth rate has increased to 7%.

Reference no: EM13204349

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