The demand for real money balances is given by , where M is the quantity of money, P is the price level, Y is output, and i is the nominal interest rate which is measured in percent. At the beginning of the year, the nominal interest rate is 5%. Over the year, the monetary base increases by 4%, the money multiplier increases by 2%, the output increases by 1% percent, and the nominal interest rate decreases by 10 BASIS POINTS. (a) If the ex ante real interest rate equals 0.5%, find the expected inflation rate at the beginning of the year. (b) Calculate the percentage change in the velocity of money. (c) [In answering this question, you are allowed to use the approximations regarding percentage changes; see page 4 of the math review (slide set 3).] Calculate the actual inflation rate. (d) Is it true that purchasing power was transferred from lenders to borrowers?
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(a) If the ex ante real interest rate equals 0.5%, find the expected inflation rate at the beginning of the year.
(b) Calculate the percentage change in the velocity of money.
(c) [In answering this question, you are allowed to use the approximations regarding percentage changes; see page 4 of the math review (slide set 3).] Calculate the actual inflation rate.
(d) Is it true that
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