Assuming the velocity of money is constant, nominal money supply is growing at 10 percent a year and real incomes are growing at 7 percent a year:
a) What is the inflation rate in this economy?
b) What would happen to the inflation rate if real incomes were growing faster? What if the money supply grew faster?
c) If the inflation rate leads to an increase in the nominal interest rate, how does this affect the velocity or money? Would the inflation rate increase or decrease?
d) Identify two reasons why the velocity of money might change. Explain in two lines each.