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= = 1. Suppose an economy has maintained a constant zero-rate of money growth, L = 0 as long as anyone can remember (...Mt-3 =

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= = 1. Suppose an economy has maintained a constant zero-rate of money growth, L = 0 as long as anyone can remember (...Mt-3 = Mt-2 Mt-1 M). As a result, they have never experienced inflation. Assume that the current price level, Pt-1 = 1, output is fixed at every period, the real interest rate is fixed at 7, and velocity is a function of the nominal interest rate: vt = 1 + it (a) Suppose households have adaptive inflation expectations of the following form: Et[t+1] =/t-1 + 1t-2. Write inflation today, 1 + t = Pt/Pt-1 as a function of past inflation. (b) All of a sudden, the government finds itself unable to pay its debts or raise taxes. It decides to print new money to obtain Y,

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