Money growth and the growth in real output over time
a. Fill in the empty spaces after Year 1 in the chart. This economy is in medium-run equilibrium in every year:
b. What is the growth rate of the nominal money supply between years 1 and 2, years 2 and 3, and years 3 and 4?
c. What is the rate of inflation between years 1 and 2, 2 and 3, and 3 and 4?
d. What is the change in the real money supply between years 1 and 2, 2 and 3, and 3 and 4?
e. Why does the equation that says that the rate of inflation and the rate of growth of money must be equal NOT hold in this case? (Hint: Think about what must happen to real money growth if real output, and thus the demand for real money is increasing over time? If real money growth must be positive, what does this imply about the relation between nominal money growth and inflation?)