2. Inflation (15 points). An economy has the following money demand function (MIP) d = .2YI(i 1/2 ) where M represents the money supply, P represents the price level, Y represents output, and i represents the nominal interest rate. For this problem, express all interest rates in terms of percentages (not in decimal form). a.) Assume the nominal interest rate i is 4 percent. If output Y is 1,000 and the money supply M is 1,200, what is the price level P? (Note: use the interest rate in terms of percentage, not in decimal form.) b.) Suppose the central bank announces a harder stance on inflation which lowers inflation expectations by 3 percentage points. According to the Fisher effect, what is the new nominal interest rate? c.) A general form of the money demand function is (M/P) d = Y/V, where V represents the velocity of money. Using this equation, calculate the velocity of money when the nominal interest rate is 4 percent and after it changes following the central bank announcement