Question: Suppose in Singapore the velocity of money is constant, real GDP grows by 7% per year, the stock on money grows by 10% per year, and the nominal interest rate is 8%.
(a) According to the quantity theory, what must the inflation rate be in Singapore?
(b) Calculate the real interest rate in Singapore.
(c) Suppose that the central bank decides to increase the money growth rate to 20% per year in Singapore (%?M = 20%). Assume that the classical dichotomy holds. Calculate the nominal interest rate after the increase in the growth rate of the money supply.
(d) Briefly discuss two social costs associated with an expected increase of inflation.