1.Suppose the labour force and capital stock are growing at a rate of 2.5% and 3% respectively, and the labour share of income is 60%. In addition, the total factor productivity is increasing at 0.8%.

Note: All the growth rates are annual rates

• "if the velocity of money is rising at 2% and the central bank wants to obtain a target of inflation at 1.5%, then it should set a monetary growth rate of 5.5%" True OR False, explain.
• suppose the growth rate of total factor productivity increase by 50% at time T, what happens to the price level at time T? explain in words.

2.Suppose you are given the following info:

Real money demand function: L(i,Y) = 0.25Y - 200i

Output: Y=8000

Money supply: MS=3200

note: both nominal and real interest rates and inflation rate are measured in percentage points (if r=5, then r=5%)

• "if the equilibrium real interest rate (r) is fixed at 4% and expected inflation is 2%, then the real money balance is 800." True OR False OR Uncertain, explain.
• Find the level of nominal money supply if the central bank wants to keep the price level to 5. What happens to the real money balance? Explain.