Assume that wages and prices are sticky and that we start at a long run equilibrium. Assume that at this initial point, the growth rate of the money supply is 6%, the growth rate of the velocity of money is 5% and that the real economic growth rate is 4%. Assume that there is a drop in consumption and investment such that causes total spending growth to drop by 5%. Assume now that the Federal Reserve is going to try and counter this drop in consumption and investment through monetary policy, and that they increase the growth rate of the money supply by 9%.
After consumption and investment fall (and before Federal Reserve action), what is the inflation rate in your graph?
After Federal Reserve action, what is the growth rate of the velocity of money?
After Federal Reserve action, what is the real economic growth rate in your graph?