Suppose the Money Demand Function Is

question 84

Essay

Suppose the money demand function is
M^d/P = 1000 + 0.2Y - 1000 (r + π^e).
(a)Calculate velocity if Y = 2000,r = .06,and π^e = .04.
(b)If the money supply (M^s)is 2600,what is the price level?
(c)Now suppose the real interest rate rises to 0.11,but Y and M^s are unchanged.What happens to velocity and the price level? So 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?

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