The demand for real money balances is given by M/P = Y/i, where M is the quantity of money, P is the price level, Y is output, and i is the nominal interest rate which is measured in percent. At the beginning of the year, the nominal interest rate is 2%. Over the year, the monetary base increases by 3%, the money multiplier increases by 2%, the output increases by 2% percent, and the nominal interest rate increases by 2 BASIS POINTS. 

(a) If the ex ante real interest rate equals 1%, find the expected inflation rate at the beginning of the year. 

(b) Calculate the percentage change in the velocity of money. 

(c) Calculate the actual inflation rate. 

(d) Is it true that purchasing power was transferred from borrowers to lenders?

Answer rating: 100% (QA)

a Expected Inflation and Fisher Equation The inflation rate is the rate at whi... View the full answer