Chapter7 - Chapter 7 Numerical Problems 1 a Real money demand is Md/P = 500 0.2Y 1000 i = 500(0.2 x 1000(1000 x 0 10 = 600 Nominal money demand is

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Chapter 7 Numerical Problems 1. a. Real money demand is Md/P = 500 + 0.2Y- 1000 i = 500 + (0.2 x 1000) - (1000 x 0. 10) = 600. Nominal money demand is Md= (Md/P) x P = 600 x 100 = 60,000. Velocity is V = PY / Md = 100 x 1000 / 60,000 = 1 2/3. b. Real money demand is unchanged, because neither Y nor i have changed. Nominal money demand is Md = (Md / P) x P = 600 x 200 = 120,000. Velocity is unchanged, because neither Y nor Md / P has changed, and we can write the equation for velocity as V = PY/Md = Y/ (Md / P). c. It is useful to use the last expression for velocity, V = Y / (Md / P) = Y / (500 + 0.2 Y - I 000i). (1) Effect of increase in real income: When i = 0. 10, V=Y/ [500 + 0.2Y - (1000 x 0. 10)]=Y/(400 + 0.2 Y)=1 /[(400/Y)+ 0.2]. When Y increases, 400 / Y decreases, so V increases. For example, if Y=2000, then V 2.5, which is an increase over V = 2.5, that we got when Y = 1000. (2) Effect of increase in the nominal interest rate: When Y = 1000, V = 1000 / [500 + (0.2 x 1000) - 1000i]= 1000 / (700 - 1000i)= 1 / (0.7 - i). When i increases, 0.7 - i decreases, so V increases. For example, if i=0. 20, then V=2, which is an increase over V = 1 2/3 that we got when i = 0. 10. (3) Effect of increase in the price level: There is no effect on velocity, since we can write velocity as a function just of Y and i. What happens is that nominal money demand changes proportionally with the price level, so that real money demand, and hence velocity, is unchanged. 2. a. Md = 100,000 - 50,000 - [5000 x (i - im) x 100]. (Multiplying by 100 is necessary since i and i' are in decimals, not percent.) Simplifying this expression. we get Md= 50,000-500,000(I-im). b. Bd = 50,000 + 500,000 (i - im).
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Adding these together we get Md + Bd = 100,000, which is Mr. Midas's initial wealth. c. This can be solved either by setting money supply equal to money demand, or by setting bond supply equal to bond
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This note was uploaded on 07/24/2008 for the course ECON 360 taught by Professor Wang during the Fall '06 term at SUNY Buffalo.

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Chapter7 - Chapter 7 Numerical Problems 1 a Real money demand is Md/P = 500 0.2Y 1000 i = 500(0.2 x 1000(1000 x 0 10 = 600 Nominal money demand is

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