1. The Central Bank of Arcadia has an in?ation target of 2%, and forecasts real GDP growth of 2.5% with no change in the velocity of money.

2. What money supply growth should it target?

3. If the Central Bank revises its velocity forecast to 3% growth, what does this do to its money supply target?

4. Assume a forecast of no change in velocity. Interest rates are currently 4%, but in- ?ation is 3% and the money supply is growing at 5.5%. Every 1% increase in inter- est rates leads to a 1% fall in money supply growth, a 0.5% reduction in output growth, and a 0.25% increase in velocity. What level do interest rates have to be to achieve the 2% in?ation target?