I’m working on a Economics question and need an explanation to help me understand better.
finish the following question.
Problem 1. Consider an economy in which the consumer price index was equal to 121 forthe year 2012 and 110 for the year 2011, with 2010 taken as benchmark (CPI = 100).1. Calculate the rate of inflation for the years 2011 and 2012.2. Assume that the rate of inflation is constant at the rate found in part 1 (yes, it shouldbe the same for both years). Assume, in addition, that the growth rate of real GDP is3% per year, and money velocity is constant. According to the quantity theory, whatis the growth rate of money supply in this economy?3. The central bank is unhappy about high inflation in the economy and wants it to beat 5% (yes, your answer to part 1 should be greater than 5%). What should the newgrowth rate of money supply be to keep inflation at that desired level?Problem 2. Consider an economy in which the long-run price level and inflation rate aredetermined according to the quantity theory of money. Assume that the velocity of moneyV¯ is constant, the supply of money M¯tis controlled by the central bank, and long-run outputY¯tis exogenously driven by technological progress.1. The central bank expands money supply by 20% relative to the previous year. Yet theprice level actually goes down by 4% during the same time period. What does thisimply about the change in real production in this economy?2. Now assume that the central bank wants to maintain the price level constant. Whatshould its action have been in part 1?3. In the future, the central bank predicts the rate of output growth to be equal to 5%per year. In order to maintain zero inflation rate, what should be the growth rate ofmoney supply in this economy?