From the equation of exchange, MV = PY, we know that spending growth (M

→ + v

→) equals nominal GDP growth (P

→ + Y

→

R) or that M

→ +

v

→ = p + Y

→

R. 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 p equal in the long run? What will Ep equal?

b. If spending growth equals 6%, what will p equal in the long run? What will Ep equal?

c. If spending growth equals 4%, what will p equal in the long run? What will Ep equal?

d. What can we say about inflation p and expected inflation Ep in the long run? : lop1