• Assume below is the money demand function for the US economy: (%)' = 5 (77) d Y (a) Derive an expression for the veloc

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Assume Below Is The Money Demand Function For The Us Economy 5 77 D Y A Derive An Expression For The Veloc 1 (474.35 KiB) Viewed 33 times

• Assume below is the money demand function for the US economy: (%)' = 5 (77) d Y (a) Derive an expression for the velocity of money. What does velocity depend on? Explain why this dependency may occur. 3 points (b) Calculate velocity if the nominal interest rate i is 9 percent. 2 points (c) If output Y is 1,000 units and the money supply M is $1,200, what is the price level P? 2 points (d) Suppose the announcement of a new Chair of the Federal Reserve, with a reputation of being hard on inflation, decreases expected inflation by 5 percentage points. According to the Fisher effect, what is the new nominal interest rate? 3 points (e) Calculate the new velocity of money. 1 point (f) If, in the aftermath of the announcement, both the economy's out- put and the current money supply are unchanged, what happens to the price level? Explain why this occurs. 2 points (g) If the new central banker wants to keep the price level the same after the announcement, at what level should she set the money supply? 2 points