What will happen to inflation

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Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4.

a. Solve for i (the nominal interest rate).

b. If the Fed increases the money growth rate by 2 percentage points per year to 7%, find ? i.

c. Go back to the initial growth rate in M of 5%. Suppose the growth rate of Y falls to 1% per year. What will happen to inflation? What must the Fed do if it wishes to keep inflation constant?

Reference no: EM132246752

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