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