Assume that wages and prices are sticky and that we start at a long-run equilibrium. Assume that at this initial point, the growth rate of the money supply is 6%, the growth rate of the velocity of money is 2% and that the real economic growth rate is 4%.
Now assume that oil prices increase. After the increase in oil prices, the inflation rate in the economy is 9%. Now assume that the federal government decides to increase government spending in order to combat the rise in oil prices. After the increase in government spending the total spending growth is now 14%.
1. After the increase in government spending, what is the growth rate of the money supply?