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
(c) What happens if the growth rate of money rises to 100% per
(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
(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?