The demand for real money balances is given by M/P=Y/i, where M is the quantity of money, P is the price level, Y is output, and i is the nominal interest rate which is measured in percent. At the beginning of the year, the nominal interest rate is 2%. Over the year, the monetary base increases by 2%, the money multiplier increases by 1%, the output increases by 2% percent, and the nominal interest rate DECREASES by 2 BASIS POINTS.

(a) If the ex ante real interest rate equals 0.5%, find the expected inflation rate at the beginning of the year.

(b) Calculate the percentage change in the velocity of money (if any).

(c) [In answering this question, you are allowed to use the approximations regarding percentage changes; see page 4 of the math review (slide set 3).] Calculate the actual inflation rate.

(d) Is it true that purchasing power was transferred from borrowers to lenders?