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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?

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Yusra Anees
Yusra AneesLv10
25 Mar 2021

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Related questions

Assume money demand looks like the following: (M/P)d = L(Y, i) = 2Y/(i0.4)

a. Explain transaction demand for money. Does this money demand equation illustrate transaction demand for money? How? Explain.

b. Explain speculative demand for money. Does this money demand equation illustrate speculative demand for money? How? Explain.

c. Derive an expression for the velocity of money. Show your work.

d. If Real GDP grows at rate g, and the nominal interest rate is constant, at what rate will the demand for real money grow? Show work

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.

Assume that, the real money demand takes the form: M/P = 0.20Y -560 i. Here Y is the real GDP = 1000 and i is the nominal interest rate. Further assume that, in the short run expected inflation is constant and is equal to 25% and the real interest rate r = .089. If the rate of nominal money growth is equal to = 75%. How much is the inflation tax?

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