Problem 2

(from Jones Chapter 8, Exercise 5)

Suppose velocity is constant, the growth rate of real GDP is 3% per year, and the growth rate of money is 5% per year. Calculate the long-run rate of inflation according to the quantity theory in each of the following cases.

1. What is the rate of inflation in this baseline case? 2. Suppose the growth rate of money rises to 10% per year. 3. Suppose the growth rate of money rises to 100% per year.