This chapter is concerned mostly with how monetary policy might be able to return an economy quickly to the potential growth rate after a shock. But as we saw in Chapter 31's discussion of the quantity theory, a market economy has a correction mechanism to return itself slowly to the potential growth rate after a shock: Flexible prices. Let's review the quantity theory, and remember that in the quantity theory, inflation does all of the adjusting. Recall that

a. Consider the nation of Kydland. Before the shock to Kydland's economy, = 10%, = 3%, real growth = 4%. What is inflation?
b. In Kydland, falls to 0%, but stays the same. In the long run, what will inflation equal? What will real growth equal?
c. Consider the nation of Prescottia. Before the shock to Prescottia's economy, = 2%, = 4%, real growth = 2%. What is inflation?
d. In Prescottia, rises to 8%. In the long run, what will inflation equal? What will real growth equal?
e. Consider the nation of Friedmania. Before the shock to Friedmania's economy, = 3%, = 0%, real growth = 3. What is inflation?
f. In Friedmania, falls to 1%. In the long run, what will inflation equal? What will real growth equal?

M Inflation Real growth