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:

Patent

A legal right granted by a government to an inventor, giving the holder exclusive rights to use, sell, and manufacture the invention for a certain period of time.

Zero Marginal Cost

A situation where producing one additional unit of a good or service does not increase the total cost of production.

Fixed Cost

Fixed costs are business expenses that remain constant regardless of the level of production or sales, such as rent or salaries.

Patent

A form of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a certain number of years.