Use the following information for the next 10 questions. You should draw a graph that depicts the situation below and use your picture to answer the questions. 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 5%, the growth rate of the velocity of money is 4% and that the real economic growth rate is 3%. Now assume that the Federal Reserve has decided to increase the growth rate of the money supply by 6% and that the Federal Reserve leaves the growth rate of the money supply at this elevated rate.
1. After the Federal Reserve increases the growth rate of the money supply, what is the growth rate of the velocity of money?
2. After the Federal Reserve increases the growth rate of the money supply, what is the new total spending growth rate?
3. After the Federal Reserve increases the growth rate of the money supply, what is the new real economic growth rate in your graph (at point 2)?
4. Now think about the point that the economy ends up at that is the new long run equilibrium.
What is the real economic growth rate?
5. Now think about the point that the economy ends up at that is the new long run equilibrium.
What is the inflation rate?