Question: From the equation of exchange, MV = PY

From the equation of exchange, MV = PY, we know that spending growth (M + u) equals inflation A+ Real growth. Recall from the chapter that in the long run (1) the inflation rate is found where the AD curve intersects the LRAS cur (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%. If spending growth equals 4%, what will n equal in the long run? What will En equal? T = Ex= What can you say about inflation (1) and expected inflation (Es) in the long run? Inflation can equal expected inflation in the long run, or it can be less than expected inflation in the long run. Inflation can equal expected inflation in the long run, or it can exceed expected inflation in the long run. Inflation and expected inflation are equal in the long run. Inflation and expected inflation are not necessarily equal in the long run.

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