Suppose a country has a money demand function (Md/P) = 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 inflation rate?
b. How would inflation be different if real income growth were higher? Explain.
c. Suppose, instead of a constant velocity money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain