Consider the money demand function that takes the form (M / P)^d = Y / (4i), where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

Question

Quizplus · Accepted Answer

The average velocity of money (V) is defined as V = PY / M. Given the money demand function (M / P)^d = Y / (4i), rearranging gives M = PY / (4i). Therefore, V = PY / M = 4i, which simplifies to 4 when considering the average velocity.

Consider the Money Demand Function That Takes the Form (M