1. Consider a money demand function that takes the form (M/P)d = Y/3i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate (measured in percentage points).
a. What is the velocity of money if the nominal interest rate is constant?
b. How will the level of the velocity of money change if there is a permanent (one time) increase in the nominal interest rate, holding other factors constant?
2. Consider the following Neoclassical model of the economy, where the domestic interest rate (r) and the world interest rate (r*) are in percentage terms. show all your work.
Y=1000,C=50+0.7(Y-T), NX=100-100ε,I=200-10r,r*=5%,G=200,T=100
a)find the equilibrium real interest rate,national saving,and investment in a closed economy.
b)now assume the small economy opens up to trade.calculate the real exchange rate,trade balance and net capital outflow.
c)assume that contractionary fiscal policymakers enacted by reducing government spending to 100. find the new real exchange rate,trade balance and net capital outflows.