1, Suppose the velocity of money is constant and potential output grows by 3% per year. By what percentage should the money supply grow in order to achieve the following inflation rate targets?

a, 0%

b, 1%

c, 2%

2, Suppose the velocity of money is constant and potential output grows by 5% per year. For each of the following money supply growth rates, what will the inflation rate be?

a. 4%

b. 5%

c. 6%

3, Here are annual values for M2 and for nominal GDP (all figures are in billions of dollars) for the mid-1990s.

Year M2 Nominal GDP

1993 3,482.0 $6,657.4

1994 3,498.1 7,072.2

1995 3,642.1 7,397.7

1996 3,820.5 7,816.9

1997 4,034.1 8,304.3

a. Compute the velocity for each year.

b. Compute the fraction of nominal GDP that was being held as money.

c. What is your conclusion about the stability of velocity in this five-year period?