(Quantity theory of money and Fisher effect). Suppose that the velocity of money V is constant, the money supply M is growing 6% per year, real GDP Y is growing at 2% per year, and the real interest rate is r = 5%. Assume that meaning the ex-post inflation rate is always equal to the expected inflation rate.

a. Find the value of the nominal interest rate (i) in this economy;

b. If the central bank increases the money growth rate by 3% per year, find the change in the nominal interest rate i;

c. Suppose the growth rate of Y falls to 1% per year. What will happen to ? What must the central bank do if it wishes to keep constant?