Suppose the money demand function takes the form (M/P) d =L(i,Y)=Y/(5i) a.) If o

Question

Suppose the money demand function takes the form (M/P)d=L(i,Y)=Y/(5i)

a.) If output grows at a rate g, at what rate will the demand for real balances grow (assuming constant nominal interest rates)?
b.) What is the velocity of money?
c.) If inflation and nominal interest rates are constant, at what rate, if any, will velocity grow?
d.) How will a permanent (once-and-for-all) increase in the level of interest rates affect the level of the velocity? How will it affect the subsequent growth rate of velocity?

Suppose the money demand function takes the form (M/P)d=L(i,Y)=Y/(5i) If output grows at a rate g, at what rate will the demand for real balances grow (assuming constant nominal interest rates)? What is the velocity of money? If inflation and nominal interest rates are constant, at what rate, if any, will velocity grow? How will a permanent (once-and-for-all) increase in the level of interest rates affect the level of the velocity? How will it affect the subsequent growth rate of velocity?

Explanation / Answer

a. at rate g.
b. 1/5
c. if inflation is constant,velocity will not grow.
d.you can lead a horse to the water.But it will change only with inflation anddeflationary pressure.

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