An economy has the following money demand function: (M/P)d = (1/3)Y/i.
Derive an expression for the velocity of money. What does velocity depend on?
Velocity = ×
Calculate velocity if the nominal interest rate i is 6 percent.
Velocity =
If output Y is 2,000 units and the money supply M is $500, what is the price level P?
Price Level =
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An economy has the following money demand function: (M/P)d = (1/3)Y/i.
Suppose the announcement of a new head of the central bank, with a reputation as a tough inflation fighter, reduces expected inflation by 2 percentage points. According to the Fisher effect, what is the new nominal interest rate?
Nominal Interest Rate = %
Calculate the new velocity of money.
Velocity =
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An economy has the following money demand function: (M/P)d = (1/3)Y/i.
If, in the aftermath of the announcement, both the economy’s output and the current money supply are unchanged, what happens to the price level?
Explain why this occurs.
If the new central banker wants to keep the price level the same after the announcement, at what level should she set the money supply?
Money Supply = $
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