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Problem 3 (50 points) Recall the quantity equation: MV =PY, where M denotes money, V velocity, P price, and Y real GDP. Recall Fisher equation:
Problem 3 (50 points) Recall the quantity equation: MV =PY, where M denotes money, V velocity, P price, and Y real GDP. Recall Fisher equation: i=r+m, where i denotes the nominal interest rate and 7 the inflation rate. Assume that velocity is constant, =7 . In the 1990s, the objective of the central bank is to maintain the inflation rate of 5%. The growth rate of real GDP is 6%, and the real interest rate is 2%. 1) Find out the growth rate of money supply in the 1990s. 2) The central bank changed its policy objective to maintain the inflation rate of 2% in the 2000s. Find out the growth rate of money supply in the 2000s. 3) What is the impacts of the monetary policy change on the real interest rate and nominal interest rate
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