In Monetaria real GDP is growing at 2% per year and the money supply is growing at 5% per year. Suppose that the velocity of money has been constant.

Suppose you are a small hats retailer. To simplify the analysis, let's assume that the only costs of doing business is paying for the merchandise you are selling. Suppose that you need to pay for the hats in December 2019 and you sell them a year later in December 2020. (Realism is not the point.) Suppose that the wholesale price of a hat is 10$, you expect to be able to sell a hat for 12$ in December 2020 and you need to borrow money to buy the hats.

1.What is the profit per hat? (Hint: the interest you pay on the loan is part of your costs).

2.Suppose that inflation rose unexpectedly to 10%. Suppose that you are able to raise your prices by the additional inflation. The interest rate on your loan remains unchanged. Now what is your profit per hat?