Suppose that in Korea the velocity of money is constant, real GDP grows by 6% per year each year, the money stock grows by 9% per year, and the nominal interest rate is 7%.
a) Using the quantity theory of money and the Fisher relation, what should be the inflation rate and the real interest rate in Korea?
b) Suppose the central bank of Korea decides to lower inflation by lowering the money supply growth rate to 8% (all else constant). Now what would be the equilibrium values of inflation and the real interest rate?