Macroeconomics homework help?

Question

In 1999, the Canadian economy was at full employment. Real GDP was $886 Billion, the nominal interest rate was around 6 percent per year, the inflation rate was 2 percent a year, the price level was 110, and the velocity of circulation was constant at 10.

Q: If the quantity of money grows at a rate of 10 percent a year and potential GDP grows at 3 percent a year, what is the inflation rate in the long run?

Please show all work.

Answer 1

V=constant

Y=+3%=1.03

M=+10%=1.1

M/P=Y/V

1.1/P=1.03/1

P=1.1/1.03=1.06796=+6.796%

Answer: long-run average inflation will be 6.796%