Suppose that the economy of Metroville can be characterized by the following equations:

Long run aggregate growth for Metroville is:

YL=2

Money growth is given as:

M=3

Money velocity growth is:

V=5C+4I+2G+NX

Initially, assumeC=I=G=NX = 0

1. What is the long run equilibrium growth rate?
2. What is the long run equilibrium inflation rate?
3. Suppose that investment growth falls to

I=1

Think about which curve this shock moves.

Calculate the new short-runoutput growth rate:

4. Suppose that investment growth falls to

I=1

Think about which curve this shock moves.

Calculate the new short-runoutput inflation rate:

5) Suppose that investment growth falls to

I=1

Think about which curve this shock moves.

Assuming the shock does not dissipate (or return back to its original level),what is the new long-run inflation rate?

6) Suppose that investment growth falls to

I=1

Think about which curve this shock moves.

Assuming the shock does not dissipate (or return back to its original level),what is the new long-run output?