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.
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.
