Suppose that a central bank wants to increase economic activity by increasing the rate of growth of the money supply.
a. What does this increase in the money supply imply about the target federal funds rate?
b. Show the effect in the IS–MP model and demonstrate the effect on the output gap.
c. If this increase in the growth rate of the money supply is expected to be permanent, is it likely that the expected inflation rate will remain constant? Briefly explain.