b. Based on the GDP deflator, what is the inflation rate from Year 1 to Year 2? (6%)

7. Comment on the following statement and show what would happen in the long run if such advice were followed by the Central Bank:"The increase in the stock market has increased people's wealth. As a result, their consumption has increased, increasing aggregate demand and output. So the Central Bank needs to increase the money supply, since with higher income, people's demand for real money balances will be higher." (12%)

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b. Based on the GDP deflator, what is the inflation rate from Year 1 to Year 2? (6%)

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