Md/P) = 2×Yb(r + πe)-a where 0 < b < 1 and 0 < a < 1. a) Use the real money demand above to determine the velocity of money. b) Does the quantity theory of money hold in this economy? Explain. c) Show with calculus how the velocity of money reacts to a change in output and a change in the nominal interest rate. d) Find the income and the nominal interest rate elasticities of money demand.

Md/P) = 2×Yb(r + πe)-a where 0 < b < 1 and 0 < a < 1. a) Use the real money demand above to determine the velocity of money. b) Does the quantity theory of money hold in this economy? Explain. c) Show with calculus how the velocity of money reacts to a change in output and a change in the nominal interest rate. d) Find the income and the nominal interest rate elasticities of money demand.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter26: Monetary Policy

Section: Chapter Questions

Problem 3SQ

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Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?
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Suppose the money demand function is = 1000 + 0.2Y - 1000 (r + πe). Required (a.) Calculate velocity if Y = 2000, r = 0.06, and πe = 0.04. (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 Ms are unchanged. What happens to velocity and the price level? (d.) For part (c.), if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?