The table below contains the following variables, growth rates of real GDP, M1, M2, velocity of M1 and M2 (denoted V1 and V2), the federal funds rate (FFR), and the CPI inflation rate. (a) State the Quantity Equation in levels and growth rates, stating what each variable means. (1pt) (b) For each year in the table, use the quantity equation to predict the equilibrium inflation rate using the growth rate of M1 (with corresponding change in velocity, g_V1). (1.5pts) (c) For each year in the table, use the quantity equation to predict the equilibrium inflation rate using the growth rate of M2 (with corresponding change in velocity, g_V2). (1.5pts) (d) For each year, predict the equilibrium inflation rate assuming the Quantity Theory of Money holds using the growth rate of M1 (i.e. assuming velocity is constant, g_V1=0). (1.5pts) (e) For each year, predict the equilibrium inflation rate assuming the Quantity Theory of Money holds using the growth rate of M2 (i.e. assuming velocity is constant, g_V2=D0). (1.5pts) (f) According to your calculations and comparing to CPI inflation data, g_CPI, given in the table, which is a better predictor of inflation, M1 ((b) & (d)) or M2 ((c) & (e))? Similarly, which is a better predictor of inflation, assuming the quantity theory holds ((d) & (e)), or not ((b) & (c))? (2pt) Table 8.3: Growth Rates g_RGDP g_M1 g_M2 g_V1 g_V2 g_FFR g_CPI 1990 1.9 3.6 5.5 2.0 0.2 8.10 5.4 1995 2.7 -0.2 2.0 5.1 2.8 5.84 2.8 2000 4.1 0.1 6.0 6.3 0.4 6.24 3.4 2005 3.3 2.1 4.3 4.5 2.2 3.21 3.4 2010 2.5 6.4 2.5 -2.5 1.2 0.18 1.6 2015 2.4 7.5 5.9 (Source: FRED II, St. Louis Federal Reserve) -3.8 2.3 0.13 0.1 Oo m 5as