Question 1
Money demand in an Economy in which no interest is paid on money is...
= 500 + 0.2Y -1000i
a. You know that P = 100, Y = 1000, and i= 0.10 Find real money demand, nominal money demand, and velocity.
b. The price level doubles from P = 100 to P = 200. Find real money demand, nominal money demand, and velocity.
c. Starting from the values in (a), determine how velocity is affected by an increase in real income (Y), an increase in the nominal interest rate, and an increase in the price level.