Question 2 Inflation and the money supply [15 points] You cannot use more than 200 words...

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Question 2 Inflation and the money supply [15 points] You cannot use more than 200 words to answer each part a. [5 points] Suppose that the money supply is perfectly controlled by the central bank and that the velocity of money is constant. Does this mean that inflation will be always on target? b. [5 points] Assume that the output gap is positive. According to the Taylor rule should the central bank increase or decrease the interest rate? c. [5 points] Name two mechanisms that can lead to a decrease in the velocity of money circulation. Question 2 Inflation and the money supply [15 points] You cannot use more than 200 words to answer each part a. [5 points] Suppose that the money supply is perfectly controlled by the central bank and that the velocity of money is constant. Does this mean that inflation will be always on target? b. [5 points] Assume that the output gap is positive. According to the Taylor rule should the central bank increase or decrease the interest rate? c. [5 points] Name two mechanisms that can lead to a decrease in the velocity of money circulation.

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a No even if the money supply is perfectly controlled by the central bank and the velocity of money ... View the full answer