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What happens to the price level at time t0

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Suppose the labour force and (physical) capital stock are growing at a rate of 2.5% and 3% respectively, and the labour share of income is 60%. In addition, the total factor productivity is increasing at 0.8%.

Note: All the growth rates are annual rates.

  1. "If the velocity of money is rising at 2% and the central bank wants to obtain a target of inflation at 1.5%, then it should set a monetary growth rate of 5.5%." True/False, explain.
  2. Suppose the growth rate of total factor productivity increases by 50% at time T=0, what happens to the price level at time T=0? Explain in words

Reference no: EM132473314

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