Suppose that the demand for money is given by where M is nominal balances, P the price

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Suppose that the demand for money is given by(  ) = - log = a + Bi + log Y

where M is nominal balances, P the price level, i the nominal interest rate, and Y is real income. a and b are parameters.

a. Explain how a constant rate of increase in the price level affects the demand for money.

b. What is the definition of the velocity of money? Use the concept of velocity to explain how a given quantity of money balances can be used to pay for a relatively large volume of consumption expenditure over a year.

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The Economics Of Money Banking And Financial Markets

ISBN: 9780321584717

4th Canadian Edition

Authors: Frederic S. Mishkin, Apostolos Serletis

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