Suppose that velocity is constant, nominal GDP is growing by 3% per year, real GDP growth rate is 0%, and the nominal interest rate is 5%. Using the quantity theory of money, the fisher equation, and the classical dichotomy, answer the following questions about the long-run.
a) What is the inflation rate?
b) What is the real interest rate.
c) What is the money growth rate?
d) Suppose that the Central Bank (i.e. the Federal Reserve) would like inflation to be 2% in this economy. Based on the information we have, what would they need to set the money growth rate to in order for inflation to be the 2% target?
e) Assume the Central Bank has set the money growth rate in order to achieve its 2% inflation target as in part d). What is the nominal interest rate as a result of this?
f) Assume the Central Bank has set the money growth rate in order to achieve its 2% inflation target as in part d). What is the real interest rate as a result of this?