In the Cagan model, if the money supply is expected to grow at some constant rate

*µ*(so that*Em*=_{t+s}*m*+_{t}*s*), then Equation A9 can be shown to imply that_{µ}*p*=_{t}*m*+_{t}*γ*._{µ}Intepret this result.

What happens to the price level

*p*when the money supply_{t}*m*changes, holding the money growth rate_{t}*µ*constant?What happens to the price level

*p*when the money growth rate_{t}*µ*changes, holding the current money supply*m*constant?_{t}If a central bank is about to reduce the rate of money growth

*µ*but wants to hold the price level*p*constant, what should it do with_{t}*m*? Can you see any practical problems that might arise in following such a policy?_{t}How do your previous answers change in the special case where money demand does not depend on the expected rate of inflation (so that

*γ*= 0)?