1.12. From the equation of exchan~, MV = PY, we know that spending growth (M + v) equals nominal GDP growth (P + Y R) or that M + -- ~

v = 7r + YR. Recall from the chapter that in the long run (1) the inflation rate is found where the AD curve intersects the Solow growth curve (reading off the vertical axis) and

(2) the expected inflation rate is found where the short-run aggregate supply curve intersects the Solow growth curve. With these things in mind, assume that the Solow growth rate is 3%

and answer parts a through d below.

a. If spending growth equals 10%, what will 7r equal in the long run? What will E7r equal?

b. If spending growth equals 6%, what will 7r equal in the long run? What will E7r equal?

c. If spending growth equals 4%, what will 7r equal in the long run? What will E7r equal?

d. What can we say about inflation 7r and expected inflation E7r in the long run?