3. (2) In class I've been using the relationship that any growth in the money supply, +1= , must cause inflation:

=

However, if over the same period of time real output (Y) grows at a rate , then the equation can modified to: =

1. a. (1) Suppose that the USA central bank (FRB) reacts to an expansion ( >0) by increasing the money supply >0 . Is the USA doomed to see a period of high inflation? Explain.
2. b. (0.5) Suppose the inflation rate is currently 4% and the growth in real output is 1%. It is declared that FRB must reduce inflation to 2.5%. What must the growth rate of money be to achieve this?
3. c. (0.5) Instead of targeting inflation by growing money supply, the FRB takes control of the exchange rate relative to the Britain, where inflation is 2%. In order to satisfy the inflation rate requirement, by how much will the FRB need to change your exchange rate each year?