5. Assume a hypothetical economy in which the velocity is constant

at 2 and real GDP is always at a constant potential of $4,000.

Suppose the money supply is $1,000 in the first year, $1,100 in

the second year, $1,200 in the third year, and $1,300 in the fourth

year.

a. Using the equation of exchange, compute the price level in

each year.

b. Compute the inflation rate for each year.

c. Explain why inflation varies, even though the money supply

rises by $100 each year.

d. If the central bank wanted to keep inflation at zero, what

should it have done to the money supply each year?

e. If the central bank wanted to keep inflation at 10% each year,

what money supply should it have targeted in each year

7. 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%

8. Suppose that a country whose money supply grew by about 20% a year

over the long run had an annual inflation rate of about 20% and that a

country whose money supply grew by about 50% a year had an annual

inflation rate of about 50%. Explain this finding in terms of the equation

of exchange.