2. Recall that the Fisher equation says that the nominal interest rate is equal to the real interest rate plus expected inflation. Thus, the Fisher equation is (fill in the blanks using the notation of Chapter 8):

(a) Recall from Question 1 that if the long-run annual growth of real output is 3%, and velocity is constant, then the quantity equation implies that (fill in the blanks): % Change in P = % Change in M %.

(b) Since the percentage change in P is the same thing as the rate of inflation, the above equation suggests that an increase in the rate of money growth of 1% causes a 1% increase in inflation. Assume "perfect foresight", meaning that the expected rate of inflation turns out to be the actual rate. Then, according to the Fisher equation, a 1% increase in inflation causes a 1% increase in the nominal interest rate i (the real interest rate r is presumed to be affected only by real variables). Now use all of this information to complete Table 2 below.

Table 2 (1) (2) (3) (4) (5) expected % change in P % change inflation: real interest nominal in M. rate (%) rate (%) interest rate (%)) 0 3 0 3 3 3 5 3 2 3 8 3