You Have Been Told That the Money Demand Function in the United

question 48

Essay

You have been told that the money demand function in the United States has been unstable since the late 1970. To investigate this problem, you collect data on the real money supply (m=M/P; where M is M₁ and P is the GDP deflator), (real)gross domestic product (GDP)and the nominal interest rate (R). Next you consider estimating the demand for money using the following alternative functional forms:
(i)m = β₀ + β₁ × GDP + β₂ x R+ u
(ii)m = β₀ × $G D P ^ { \beta 1 }$ x ${ R } ^ { \beta 2 }$ × e^u
(iii)m = β₀ × $G D P ^ { \beta 1 }$ x $1 + R ^ { \beta _ { 2 } }$ × e^u
Give an interpretation for β₁ and β₂ in each case. How would you calculate the income elasticity in case (i)?

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Definitions:

Financial Stability

A situation in which an individual or entity is able to meet its financial obligations on time without the risk of default.

Widowhood

The state of having lost one's spouse through death, which can have significant psychological, social, and financial impacts.

Social Class

A division of a society based on social and economic status, influencing individuals' lifestyles, education opportunities, and occupational prospects.

Fearing Divorce

The apprehension or anxiety about the potential dissolution of a marriage, which can influence individuals' decisions and relationships.