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Suppose that the real money demand function is <br/> L(Y , r + e ) = 0.01 Y / ( r + e ) where Y is real output, r is the real interest rate, and It' is the expected rate of inflation. Real output is constant over time at Y = 150. The real interest rate is fixed in the goods market at r = 0.05 per year.
A) Suppose that the nominal money supply is growing at the rate of 10% per year and that this growth rate is expected to persist forever. Currently, the nominal money supply is M = 300. What are the values of the real money supply and the current price level?
B) Suppose that the nominal money supply is M = 300. The central bank announces that from now on the nominal money supply will grow at the rate of 5% per year. If everyone believes this announcement, and if all markets are in equilibrium, what are the values of the real money supply and the current price level?
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