Introduction to Econometrics 3rd Edition by James Stock, James Stock

Exercise 16

A standard "money demand" function used by macroeconornists has the form ln( m ) = 0 + 1 ln(GDP) + 2 , where 111 is the quantity of (real) money, GDP is the value of (real) gross domestic product, and R is the value of the nominal interest rate measured in percent per year. Suppose that 1 = 1.0 and 2 = 0.02. What will happen to the value of 111 if GDP increases bY₂% What will happen tom if the interest rate increases from 4% to 5%