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Question
Consider the standard dynamic model of money in which the economy is in a steady state with constant levels of output, inflation, and the nominal interest rate. Suppose initially that the steady-state nominal interest rate is 4 percent, the steady-state inflation rate is 2% percent, and the growth rate of the money supply is 2 percent. How will an unanticipated permanent decline in the growth rate of the money supply to 0 percent affect the level of output, the inflation rate, and the nominal interest rate?Answer
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