Suppose that the money-demand function takes the form Md/P = L(Y,i) = Y
That is, for a given nominal interest rate, i, a doubling of real GDP, Y, doubles the real quantity of money demanded, Md/P.
a. Consider the relation across countries between the growth rate of money (currency), μ, and the inflation rate, π, as shown in Figure 11.1. How does the growth rate of real GDP, ΔY/Y, affect the relationship between μ and π?
b. What is the relation between μ and π for a country in which the nominal interest rate, i, has increased? c. Suppose that the expected real interest rate, !!, is given. What is the relation between μ and π for a
country in which the expected inflation rate, !!, has increased?