Question 3 (40 marks) An economy has the following money demand function: (M/P)d=0.2Y/i0.5 where i is the nominal interest rate. d. Suppose the announcement of a new head of the central bank, with a reputation for being soft on inflation, increases expected inflation by 5% points. According to the Fisher effect, what is the new nominal interest rate (assuming the original nominal interest rate is 4% ? [5 marks] e. Verbally explain the effect of the increase in expected inflation in part d) on the real money demand and the velocity. [7 marks] f. Calculate the new velocity and the price level for part d) if the output and the money supply remain unchanged. Show your workings. [6 marks]