Suppose velocity of money is constant, the growth rate of real GDP is 3% per year, and the growth rate of money is 5% per year. Consider this a “baseline.” In each case show (don’t just state) what’s happening. I.e., show your work.
(a) What is the rate of inflation in this baseline case?
(b) What happens if the growth rate of money rises to 10% per year?
(c) What happens if the growth rate of money rises to 100% per year?
(d) Return to the baseline case; what would happen if real GDP growth were to rise to 5% per year?
(e) What would happen if real GDP growth fell to 2% per year?
(f) Again go back to the baseline case; what happens to inflation if money velocity rises at 1% per year? What might cause money velocity to change like this?