Handout 6

# Handout 6 - & e and Y are unchanged 3 Suppose the money...

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Econ 3140 Fall 2009 Handout #6 1. Suppose the money demand function is M d P = 1000 + 0 : 2 Y 1000( r + e ) . (a) Calculate velocity of money if Y = 2000 , r = 0 : 06 , and e = 0 : 04 . (b) If the money supply ( M s ) is 2600 , what is the price level? (c) Now suppose the real interest rate rises to 0 : 11 , but Y and M s are unchanged. What happens to velocity and the price level? So if the nominal interest rate were to rise from 0 : 10 to 0 : 15 over the course of a year, with Y remaining at 2000 , 2. Suppose the real money demand function is M d P = 2400 + 0 : 2 Y 10 ; 000( r + e ) (a) Assume M = 4000 , P = 2 : 0 , e = 0 : 03 , and Y = 5000 . What is the real interest rate that clears the asset market? (b) Now assume that rises to M = 5000 . If the price level were to decrease from 2 : 5 to 2 : 0 , then the real interest rate would decrease by how many percentage points (assuming M d
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Unformatted text preview: , & e , and Y are unchanged)? 3. Suppose the money demand function is given by M d P = 640 + 0 : 1 Y & 5000( r + & e ) : Suppose the central bank changes the nominal money supply depending on income and in&ation: M s = 1000 + 0 : 1 Y & 4000 & . (a) If expected in&ation equals actual in&ation = 0 : 03 , Y = 1000 , and r = 0 : 02 , calculate the price level. (b) If in&ation rises to : 04 while the other variables remain as in part a., calculate the price level. (c) If expected in&ation rises to : 04 while the other variables remain as in part a, calculate the price level. (d) If the real interest rate rises to : 03 while the other variables remain as in part a, calculate the price level. 1...
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