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# According to the quantity of money, if velocity remains constant, inflation (the growth rate of prices) is roughly equal to the growth rate of money…

1. 1. According to the quantity of money, if velocity remains constant, inflation (the growth rate of prices) is roughly equal to the growth rate of money supply minus the growth rate of real GDP. Assume that velocity is fixed and real GDP grows at 7%per year.

A) what are the inflation rates that result from 5%, 10%, and 15% growth rate of money supply? B) if the government wants to keep inflation at about 4% per year, what is the Long Run growth rate of money supply that the central bank should aim at? C) if the governments are stable at 20%, and the actual M2 money multiplier is stable at 3, what is the Long Run growth rate of reserve money supply that the central bank should aim at in order to achieve the growth rate of money supply in b)? d)suppose that, because of changes in the institutional structure of the financial system, the velocity of money increased by 2%per year for 3 years. If the central bank was unaware of the change in money velocity, and enacted the growth rate of money supply in b), what would the inflation rate end up being after 3 years?

2. 2. In the period between 2000 and 2007, china had inflation rates of about 5% per year, and GDP growth rates of about 11% per year.

A) assuming that velocity of money did not change over that period, how fast did the money supply grow? B)MO (reserve money) was about 10% of GDP, how much seigniorage did the Central Bank earn as a percentage of GDP?

3. 3. You are told that the nominal interest rates in Country A is 14%, and the nominal interest rates in Country B is 8%. Economists estimate that the real interest rate 2% per year in both countries.

A) what would you expect inflation to be in country a and country b? b)if the exchange rate adjusts to keep the real prices of goods the same in the two countries, how would the exchange rate between country a and country b adjust over time?

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