d) How would your answer to b) would change if velocity growth was not constant, but instead was a random variable vt? You can answer this with algebra or words, your choice.
d) How would your answer to b) would change if velocity growth was not constant, but instead was a random variable vt? You can answer this with algebra or words, your choice.
Chapter15: The Debate Over Monetary And Fiscal Policy
Section: Chapter Questions
Problem 2DQ
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Question
D only!
Transcribed Image Text:Suppose you are put in charge of the central bank in an economy where potential GDP is
growing at 3% and inflation has been 5% a year for the past few years.
a) You find out that your predecessor had increased the money supply by 7% a year during this
time. What does that say about the rate of velocity growth in this economy?
b) You decide that 5% inflation is too high a rate, and that you need to take steps to reduce
inflation to 2% a year. Assuming that the growth rate of velocity is a constant, what is the
new rate of money growth you should implement in this economy?
c) Continuing with your answer from b), what is the new rate of money growth you should
implement in this economy to keep inflation at 2% a year if all else equal
i) The growth rate of potential output rises to 4%
ii) The growth rate of velocity falls to 0%
d) How would your answer to b) would change if velocity growth was not constant, but instead
was a random variable vt? You can answer this with algebra or words, your choice.
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