Suppose that in the U.S., the income velocity of money (V) is constant. Suppose, in addition,that every year, real GDP (Y) grows by 3 percent and the supply of money (M) grows by 4 percent.
a. According to the quantity theory of money, what will be the growth rate of nominal GDP =P×Y?
b. What will be the inflation rate?
c. If the central bank wants the inflation rate to be 0%, what money supply growth rate (i.e. -%?M per year) should it set?
d. All else equal, how would your answers to a, b, and c be different if real GDP were growingat a rate of 6% per year?