Suppose a country has a money demand function (M/P)d = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year.

i. What is the average inflation rate?

ii. How would inflation be different if real income growth was higher? Explain.

iii. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily due to financial innovation. How would this affect the inflation rate? Explain.