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expected inflation rate

A. Suppose that the Fed Reserve adopts an inflation targe of 3% for its monetary policy. If the long run growth rate of real GDP(Y) is 2%, then at what rate would the quantity of money (or money supply) have to grow to meet this inflation target?

b. In the short run, why might the Federal Reserve miss their inflation target of 3%?

Solution Preview

a) Inflation rate is actually the change of Price Level
Since MV=PY and after the growth, M'V = P' Y'
P' = (1+3%)P = 1.03P and Y' = (1+2%)Y = 1.02Y; V is constant
Then RHS = P'Y' = ...

Solution Summary

Estimate expected inflation rate.