Question 1 of 3
Step 1
From the equation of exchange, MV = PY, we know that spending growth 
equals Inflation (π) + Real growth. Recall from the chapter that in the long run, (1) the inflation is found where the AD curve intersects the LRAS curve (reading off the vertical axis), and (2) the expected inflation rate is found where the short-run aggregate supply curve intersects the LRAS curve.
With these things in mind, assume that the Solow growth rate is 3% and answer the following questions.
If spending is growing at 10% per year what is inflation in the long run?
If spending is growing at 10% per year what is expected inflation in the long run?
What can we say about inflation (π) and expected inflation (Eπ) in the long run?
Step 2
From the equation of exchange, MV = PY, we know that spending growth equals Inflation (π) + Real growth. Recall from the chapter that in the long run, (1) the inflation is found where the AD curve intersects the LRAS curve (reading off the vertical axis), and (2) the expected inflation rate is found where the short-run aggregate supply curve intersects the LRAS curve.
With these things in mind, assume that the Solow growth rate is 3% and answer the following questions.
If spending is growing at 6% per year what is inflation in the long run?
If spending is growing at 6% per year what is expected inflation in the long run?
Step 3
From the equation of exchange, MV = PY, we know that spending growth equals Inflation (π) + Real growth. Recall from the chapter that in the long run, (1) the inflation is found where the AD curve intersects the LRAS curve (reading off the vertical axis), and (2) the expected inflation rate is found where the short-run aggregate supply curve intersects the LRAS curve.
With these things in mind, assume that the Solow growth rate is 3% and answer the following questions.
If spending is growing at 4% per year what is inflation in the long run?
If spending is growing at 4% per year what is expected inflation in the long run?