Suppose the Money Demand Function Is Given by

question 48

Essay

Suppose the money demand function is given by
Md/P = 640 + 0.1Y - 5000 (r + ?e).
Suppose the central bank changes the nominal money supply depending on income and inflation:
Ms = 1000 + 0.1Y - 4000?.
(a)If expected inflation equals actual inflation = 0.03,Y = 1000,and r = 0.02,calculate the price level.
(b)If inflation rises to 0.04 while the other variables remain as in part a,calculate the price level.
(c)If expected inflation rises to 0.04 while the other variables remain as in part a,calculate the price level.
(d)If the real interest rate rises to 0.03 while the other variables remain as in part a,calculate the price level.

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Definitions:

Critical Value

A threshold in hypothesis testing, which the test statistic must exceed in order to reject the null hypothesis, indicating a statistically significant result.

Degrees of Freedom

The capacity of different values or numerals that can be designated to a statistical distribution.

α

A symbol often used to denote the probability of making a Type I error in hypothesis testing, representing the significance level.

Level of Significance

The probability threshold in hypothesis testing below which the null hypothesis is rejected, indicating statistical significance.