In 2004, the economy was at full employment, with a real GDP of $886 billion, a 6% nominal interest rate per annum, a 2% annual inflation rate, a 1.1 price level, and 10 velocity of circulation.
a) What was the “basic quantity equation of money” in this economy? From this relation, what is the equation for money supply (M)?
b) If potential GDP grows at 3% and quantity of money grows at 10%, (a) what is the long run rate of inflation, and (b) what is the velocity growth rate?