Suppose velocity is constant and real output grows at 3% per year and money supply grows at 8% per year. Using the Quantity Theory of Money, answer the following:
a) Suppose real output falls by 2%, what will the inflation rate be?
b) Assume 3% output growth and 8% money supply growth, what will happen to the inflation rate if velocity is not constant but increases?
c) Using the equation of exchange to derive the money demand function explains in function form and conceptually the relationship between money demand and general prices.