# Suppose a country has a money demand function (M/P)d = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average

Suppose a country has a money demand function (M/P)d = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year.

a. What is the average inflation rate?

b. How would inflation be different if real income growth were higher? Explain.

c. Suppose that instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would this situation affect the inflation rate? Explain.

a. What is the average inflation rate?

b. How would inflation be different if real income growth were higher? Explain.

c. Suppose that instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would this situation affect the inflation rate? Explain.

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**ISBN:** 978-1464168505

5th Canadian Edition

**Authors:** N. Gregory Mankiw, William M. Scarth

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