How would inflation be different if real income growth high

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Reference no: EM13236345

Suppose a country has a money demand function (Md/P) = 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 inflation rate?

b. How would inflation be different if real income growth were higher? Explain.

c. Suppose, instead of a constant velocity 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

Reference no: EM13236345

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