Assume that the classical quantity theory of money holds. Suppose that over a 20-year period, real aggregate output grows on average by 2.8% per year.
a) {2 pts} If, during this 20—year period, the money supply grows on average 5.2% per year, what will the average annual inflation rate be?
b) {2 pts} Suppose that during this 20-year period, lenders require an annual real interest rate of 1.1%. Assume that everyone knows that the money supply will grow on average of 5.2% per year and that real output will grow on average of 2.8% per year. Use the Fisher equation to predict the annual nominal interest rate.
