Suppose you are put in charge of the central bank in an economy where potential GDP isgrowing 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 thistime. 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 reduceinflation to 2% a year. Assuming that the growth rate of velocity is a constant, what is thenew 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 shouldimplement in this economy to keep inflation at 2% a year if all else equali) 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 insteadwas a random variable vt? You can answer this with algebra or words, your choice.

The quantity theory of money: MV = PY Where M is the money supply. V is the velocity of money. P…

Answered: Suppose you are put in charge of the…

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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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