Consider the 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? Explain your answer based on the relationship between money demand and the nominal interest rate.

Question

Consider the 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? Explain your answer based on the relationship between money demand and the nominal interest rate.

Quizplus · Accepted Answer

The Answer of Consider the 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? Explain your answer based on the relationship between money demand and the nominal interest rate.

Consider the Money Demand Function That Takes the Form (M/P)d=Y/3i