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4. Suppose money demand for Econland is (M/P)0 = 5000 + 0.2Y +1000i. a. Assume P=100, Y=1000 and i=0.1. Find the real money d

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Answer #1

a) Real money demand = 5000 + 0.2*1000 + 1000*0.1 = 5300

Nominal Money demand = Real money demand * Price = 530000

Velocity = Price * Output / money = 100*1000/530000 = 0.19

b) Now P = 200. Real money demand is same at 5300.

Nominal money demand is 5300*200 = 1060000.

Velocity = New price * output / money = 200*1000/1060000 = 0.19

Hence doubling the price will double nominal money balance but there is no change in real output or velocity of money

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