Question

Consider an economy in which the money demand function takes the form:

(M/P) d = L (i, Y) = Y/(5i)

a. If output grows at rate g, at what rate will the demand for real balances grow (assuming constant nominal interest rates)?

b. What is the velocity of money in this economy?

c. If inflation and nominal interest rates are constant, at what rate, if any, will velocity grow?

d. How will a permanent (once-and-for-all) increase in the level of interest rates affect the level of velocity? How will it affect the subsequent growth rate of velocity?

Answer #1

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Suppose that the money demand function takes the form
(M/P)d = L (i, Y) = Y/(5i)
a. If output grows at rate g and the nominal interest rate is
constant, at what rate will the demand for real balances grow?
b. What is the velocity of money in this economy?
c. If inflation and nominal interest rates are constant, at what
rate, if any, will velocity grow?
d. How will a permanent (once-and-for-all) increase in the level
of interest rates...

Suppose that the money demand function takes the following
form:
[ ? ? ] ? = ?(?, ?) = ? /5?
a. What is the velocity of money in this economy? Show your
work.
b. If expected inflation and nominal interest rates are
constant, at what rate, if any, will velocity grow? Explain your
answer.
c. How will a permanent (once-and-for-all) increase in the level
of the nominal interest rate affect the level of velocity? How will
it affect the...

Suppose that the money demand function takes the following
form:
[ ? ? ] ? = ?(?, ?) = ? /5?
a. What is the velocity of money in this economy? Show your
work.
b. If expected inflation and nominal interest rates are
constant, at what rate, if any, will velocity grow? Explain your
answer.
c. How will a permanent (once-and-for-all) increase in the level
of the nominal interest rate affect the level of velocity? How will
it affect the...

In Freedonia the real demand for money is d = (M/P)d
= L(i,Y) = Y/(5i1/3 ), i being the nominal interest
rate.
(a) What is the income velocity of money in Freedonia?
(b) Suppose output is growing at the annual rate of g. What is
the growth rate of real money demand?
(c) If the nominal interest rate is constant, what is the growth
rate of velocity?
(d) Suppose at time 1 there is a permanent increase in i. What...

Assume the real money demand function is
L(Y;i)=2000+0.3Y-5000i
where Y is real output, P is the price level, i is the nominal
interest rate on non-monetary assets and monetary assets earn no
interest.
a) Assuming that the asset market is in equilibrium at i=0.05.
Find equilibrium levels of real money supply, nominal money supply,
and the velocity of money if P=100, and
Y=2000.
b) Find the real income elasticity of money demand at the
equilibrium level of money balances found...

In Freedonia the real demand for money is L = (M/P)d
= kY, k a constant. The money supply is growing at 12% per year and
real income, Y, is growing at 4% per year.
(a) What is the income velocity of money in Freedonia?
(b) What is Freedonia’s annual inflation rate?
(c) Suppose the income velocity of money is growing at the rate
of 1%. What is Freedonia’s annual rate of inflation.

In the country of Wiknam, the velocity of money is constant.
Real GDP grows by 5 percent per year, the money stock grows by 14
percent per year, the nominal interest rate is 11 percent and the
real interest rate is 2%
1. In Wiknam if Real GDP growth slows what would you expect to
happen to the inflation rate? Explain using the model why.
2. If Wiknam households expect higher inflation in the coming
year, how might that effect...

Assume that the demand for real money balance, (M/P) d = 0.5Y –
200i, where Y is national income and i is the nominal interest rate
(in percent). The real interest rate r is fixed at 2 percent by the
investment and saving functions. The expected inflation rate is 1
percent, real GDP is 5,000 and the money supply is 209,110.
a. What is the nominal interest rate?
b. What is the price level?
c. Now suppose Y is 2,000,...

Suppose that the real money demand function is
L(Y, r+πe)=0.01Yr+πe ,L(Y, r+πe)=0.01Yr+πe ,
where YY is real output, rr is the real interest rate, and πeπe
is the expected rate of inflation. Real output is constant over
time at Y=150Y=150. The real interest rate is fixed in the goods
market at r=0.05r=0.05 per year.
Suppose that the nominal money supply is growing at the rate of
10% per year and that this growth rate is expected to persist
forever. Currently,...

Suppose the money demand function is
Md/P = 1000 + 0.2Y - 1000 (r + πe).
(a) Calculate velocity if Y = 2000, r = .06, and πe =
.04.
(b) If the money supply (Ms) is 2600, what is the price
level?
(c) Now suppose the real interest rate rises to 0.11,
but Y and Msare unchanged. What happens to velocity and the price
level? So, if the nominal interest rate were to rise from 0.10 to
0.15 over...

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