Answer Happy

(a) In the context of the Quantitative Theory of
Money comment on the following sentence: “In order for inflation to
be constant, the growth rate of the money supply should be equal to
the growth rate of real output”.
(b) Write down the “Fisher Equation” and explain the
Fisher effect.
(c) Suppose that the velocity of money is not constant,
and it is related to the nominal interest rate, such that the
velocity is a function of the nominal interest rate: V(i). Explain
how the velocity of money would change when the nominal interest
changes.
(d) Consider the equilibrium in the money market is given
by M/P=L(Y,i), where M denotes the money supply, P the fixed
aggregate price level, i denotes the nominal interest rate and Y
aggregate real income. Suppose that the money market starts at the
equilibrium. Now assume that money supply is increased (everything
else constant). Using a diagram to illustrate your answer, explain
how the interest rate adjusts to maintain the money market
equilibrium in the context of the “theory of liquidity
preference”
(e) Suppose we are in the long run and the aggregate price
level is flexible. Using the Fisher question in the money market
equilibrium condition M/P=L(Y,i), as in (c), explain how an
increase in expected inflation (everything else constant) will
affect the aggregate price level.