Money demand is an economy in which no interest is paid on money is Md/P=500+0.2

ID: 1176492 • Letter: M

Question

Money demand is an economy in which no interest is paid on money is

Md/P=500+0.2Y-1000i

a. Suppose that P=100, Y=1000, and i=0.10. Find real money demand, nominal money demand,

and velocity.

b. The price level doubles from P=100 to P=200. Find real money demand, nominal money

demand, and velocity.

c. Starting from the values of the variables given in part (a) and assuming that the money

demand function as written holds, determine how velocity is affected by an increase in real

income, by an increase in the nominal interest rate, and by an increase in the price level.

a) real money demand = 500 +.2*1000 - 1000*.1 = 600

nominal money demand = 600*100 = 60000

MV = PY

60000 * V = 100*1000

V = 100000/60000 = 1.67

b) real money demand = 500 +.2*1000 - 1000*.1 = 600

nominal money demand = 600*200 = 120000

MV = PY

120000 * V = 200*1000

V = 200000/120000 = 1.67

c) V = PY/M

Increase in price level has no effect on the velocity as it changes the nominal money supply as well.

Increase in real income and interest rate will decrease the velocity as the money supply will increase.

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.