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2) Money demand in an economy in which no interest is paid on money is Md/P = 250+0.2Y - 500i.

(a) Suppose that P = 50, Y = 500, and i = 0.10. Find real money demand, nominal money demand, and velocity.

(b) The price level doubles from P = 50 to P = 100. Find real money demand, nominal money demand, and velocity.

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

Suppose that the money demand function takes the form (M/P)d = L(Y, i) = Y/(5i), 

M=money
P=price
i= nominal interest rate
Y=output

(a) If output grows at rate g, what rate will the demand for real balances grow (assuming constant nominal interest rates)?
(b) What is the velocity of money?
(c) If inflation and nominal interest rates are constant, at what rate, if any, will velocity grow?

An economy has the following money demand function: (M/P) d 5 .2Y/i^½.

a. Derive an expression for the velocity of money. What does velocity depend on? Explain why this dependency may occur.

b. Calculate velocity if the nominal interest rate i is 4 percent.

c. If output Y is 1,000 units and the money supply M is $1,200, what is the price level P?

Consider the following demand equation for money.

(M/P)d = kY

a) In words, explain what the velocity of money is.

b) Let the supply of (real) money be given by M/P. Using the money demand equation, solve for the velocity of money.

c) Suppose that real GDP is expected to grow 3% over the next year and k is constant. What is the expected rate of inflation if the Fed holds the money supply constant?

d) Suppose that the Fed (Federal Reserve) targets inflation to be 2% over the coming year. What should be the targeted growth rate of the money supply?

e) Suppose that growth in real GDP ends up being 1%. Assuming the Fed carries out its open market operations, expecting a growth rate of 3%, what will happen to the rate of inflation?

f) Is there reason to think that demand for money should be a function of the nominal interest rate? Why?

g) Modify the money demand equation that is given to include the nominal interest rate.

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