Consider the quantity equation seen in class MtVt = PtYt. Denote as a lower case letter a variable in logarithms. Thus the quantity equation in logarithms is mt vt = pt yt. Now, assume that the velocity of money is increasing in the nominal interest rate i. Since bonds pay a nominal interest rate of i, the opportunity cost of holding money is the foregone interest. Therefore, if nominal interest rate increases, money should change hands more quickly, i.e. the velocity of money increases. More formally, assume that velocity is v(i) = i, with > 0. Denote inflation as t = pt pt1, and expected inflation as e t . In class we mentioned that the Fisher equation relates to a non-arbitrage condition between the nominal interest rate i, the real interest rate r, and expected inflation