What is the rate of inflation in the baseline case

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Reference no: EM13237011

Suppose velocity is constant, the growth rate of real GDP is 3% per year, and the growth rate of money is 5% per year. Calculate the long- run rate of inflation according to the quantity theory in each of the following cases:

a) What is the rate of inflation in this baseline case?

b) Suppose the growth rate of money rises to 10% per year.

c) Suppose the growth rate of money rises to 100% per year.

d) Back to the baseline case, suppose real GDP growth rises to 5% per year.

e) What if real GDP growth falls to 2% per year?

f) Return to the baseline case and suppose the velocity of money rises at 1% per year. What happens to inflation in this case? Why might velocity change in this fashion?

Reference no: EM13237011

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