Use the following information for the next 9 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 7%, the growth rate of the velocity of money is 2% and that the real economic growth rate is 4%. Now assume that the Federal Reserve has decided to increase the growth rate of the money supply by 4% and that the Federal Reserve leaves the growth rate of the money supply at this elevated rate.
1. What is the inflation rate at the initial long-run equilibrium (the point where we start)?
2. What is the value of expected inflation for the SRAS curve before the Federal Reserve increases the growth rate of the money supply?
3. After the Federal Reserve increases the growth rate of the money supply (Point 2), what is the growth rate of the velocity of money?