Assume that the money-demand function takes the form Md/P = L(Y,i) = Y
That is, for a given nominal interest rate, i, a doubling of real GDP, Y, doubles the real quantity of money demanded, Md/P.
1. Determine the relation across countries among the growth rate of money, μ, and the inflation rate, π. Explain how does the growth rate of real GDP, ΔY/Y, affect the relationship among the μ and π?
2. Calculate the relation among μ and π for a country in which the nominal interest rate, i, has increased? Assume that the expected real interest rate, !!, is given. Determine the relation between μ and π for a country in which the expected inflation rate, !!, has increased?