Consider the Money Demand Function That Takes the Form (M/P)d=Y/3i

question 119

Essay

Consider the money demand function that takes the form (M/P)d=Y/3i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate (measured in percentage points).
a. What is the velocity of money if the nominal interest rate is constant?
b. How will the level of the velocity of money change if there is a permanent (one time) increase in the nominal interest rate, holding other factors constant? Explain your answer based on the relationship between money demand and the nominal interest rate.

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Definitions:

Cardiac Muscle

Specialized muscle tissue found only in the heart, capable of continuous, rhythmic contractions to pump blood throughout the body.

ANS

The Autonomic Nervous System, which controls involuntary bodily functions such as heart rate, digestion, and respiratory rate.

CNS

Central Nervous System, which includes the brain and spinal cord, responsible for processing and coordinating information in the body.

Efferent Neurons

Nerve cells that conduct impulses away from the central nervous system to muscles and glands.