6. The equation of exchange is helpful for determining the effect of money supply changes on the price level. Use the equation of exchange to answer each of the following questions.

a. Real GDP grows at 3% and inflation is equal to 2%, but there is no change in velocity.

What can you conclude about the change in the money supply?

b. Real GDP falls by 3% and there is no inflation, but the money supply grew by 5%.

What is the implied change in velocity?

c. Real GDP increases by 3%, velocity does not change, and the money supply grows by 10%. What is the implied rate of inflation?

d. The money supply grows at 6%, velocity is constant, and inflation is 3%. What can you conclude about the rate of real GDP growth? L-89