6. 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?

Chapter 11 Monetary Policy and the Fed

11.4 Review and Practice 479

a. 0% b. 1% c. 2%

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.