Question:
Based on the quantity equation of exchange (with income velocity V constant) and the Fisher effect, what would be the appropriate percentage values for inflation, real GDP growth, and SHORT TERM nominal interets rates (i)? Assume 3% is the Yf (full employment) growth rate for the real GDP and the real SHORT TERM interest rate (r) is constant at 1%.
1) If Y = Yf, and %change of M (money supply) is 5%...
a) what is % GDP inflation
b) what is % GDP growth
c) nominal interest rate (i)?
2) If the Fed DECREASES money supply growth from 5% to 3%....
IN THE SHORT RUN...
a) what is % GDP inflation
b) what is % GDP growth
c) nominal interest rate (i)?
IN THE LONG RUN...
a) what is % GDP inflation
b) what is % GDP growth
c) nominal interest rate (i)?
3) to DECREASE money supply, should the Fed buy or sell Treasury securities? Why.