Suppose that natural real output in the country of Eudemonia grows at a steady r

Question

Suppose that natural real output in the country of Eudemonia grows at a steady rate of 3 percent per year. In the past, velocity has been approximately constant, and the Eudemonian Central Bank (ECB) has maintained a target rate of growth of 4 percent per year for the money stock. What would be the resulting rate of inflation? Now suppose that the introduction of Internet banking allows people to make transactions on line without holding large amounts of currency or bank balances. As Internet banking spreads, velocity begins to increase at a rate of 3 percent per year. What will happen to the rate of inflation? How could the ECB offset the impact on inflation, if any?

Explanation / Answer

percent change in the money supply) + (percent change in velocity) = (percent change in the price level(inflation)) + (percent change in output)

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