In the Cagan model, if the money supply is expected to grow at some constant rate µ (so that Emt+s = mt + sµ), then Equation A9 can be shown to imply that pt = mt + γµ.
Intepret this result.
What happens to the price level pt when the money supply mt changes, holding the money growth rate µ constant?
What happens to the price level pt when the money growth rate µ changes, holding the current money supply mt constant?
If a central bank is about to reduce the rate of money growth µ but wants to hold the price level pt constant, what should it do with mt? Can you see any practical problems that might arise in following such a policy?
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)?