the following question, please review that For Nominal money demand, MD , depend
ID: 1161274 • Letter: T
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the following question, please review that For Nominal money demand, MD , depends positively on P, positively on Y, and negatively on i. Realmvoneydemand = Nominal money demand / Price level : MD/P Real money demand depends positively on Y and negatively on i. Velocity (of circulation of money), V, measures how many times per year a S in money supply is used on the average in making payments in the economy (when buying good and services that are included in real GDP) Velocity (of circulation of money) nominal GDP /nominal amount of money - (PaY)/M. Notice that V is also equal to real GDP real amount of money Questions: 1. Consider an economy in which the demand for real money is given by (MD/P) (0.25)r(Y) so that it is proportional to real output Y and independent of the nominal interest rate i What can you say about the velocity of circulation of money in this economy?Explanation / Answer
MD/P = (0.25)x(Y)
MD = (0.25P)x(Y)
Therefore,
Velocity of circulation (V) = (PxY)/M = (PxY) / [(0.25P)x(Y)]
V = 1/0.25
V = 4
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