Question

Suppose that the nominal money supply is growing at the rate of 10% per year and that this growth

rate is expected to persist for ever. Currently, the nominal money supply is M = 400. What are the values

of the real money supply and the current price level? (Hint: What is the value of the expected inflation

rate that enters the money demand function?)

Answer 1

If the nominal money supply is growing at the rate of 10% per year, and the nominal money supply is M = 400, then the expected inflation rate is about 10% to be compensated with the increase in money supply, the real money supply depends on the required reserves rate and resulting money multiplier, and the current price level is unknown.