The income elasticity of money demand is 2/3 and the interest elasticity of money demand is -0.1. Real income is expected to grow by 4.5% over the next year, and the real interest rate is expected to remain constant over the next year. The rate of inflation has been zero for several years.
a) If the central bank wants zero inflation over the next year, what growth rate of the nominal money supply should it choose?
b) By how much will velocity change over the next year if the central bank follows the policy that achieves zero inflation?