Question: Inflation and the quantity theory: Suppose velocity is constant, the growth rate of real GDP is 3% per year, and the growth rate of money is 5% per year. Calculate the long-run rate of inflation according to the quantity theory in each of the following cases:
(a) What is the rate of inflation in this baseline case?
(b) Suppose the growth rate of money rises to 10% per year.
(c) Suppose the growth rate of money rises to 100% per year.
(d) Back to the baseline case, suppose real GDP growth rises to 5% per year.
(e) What if real GDP growth falls to 2% per year?
(f) Return to the baseline case and suppose the velocity of money rises at 1% per year. What happens to inflation in this case? Why might velocity change in this fashion?