10-11

10. (-) Assume that the money demand function has the form (M/P)d=L(i,Y)=Y/(5i) a) If the real output is growing at a rate g, what will be the rate of growth of the demand for real money balances (assuming constant nominal interest rates)? b) What is the velocity of money in this economy? c) Suppose the nominal interest rates and inflation are stable, what will be the rate of change (if any) in velocity of money? d) What is the effect of an increase in the nominal interest rate on the velocity of money? 11. () Explain the following: a) What effect has the extension of the ATM network on the demand for money? b) How do financial innovations affect the ability of central banks to conduct monetary policy