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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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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?

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 an economy with floating exchange rates, price level is 100, exchange rate is 20, money supply is 10 million. Then suddenly the central bank increases money supply with 100% and keeps money supply at that (higher) level permanently. Calculate real money supply (M/P) in the long run, nominal exchange rate in the long run and expected exchange rate. Describe what happens with nominal interest rate in the short run and in the long run and describe the development of the nominal exchange rate from short to long run.

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