Question: Suppose the money demand function is M d / P = 2 0 0 0 + 0 . 2 Y - 1 0 0 0

Suppose the money demand function is M d /P =2000+0.2Y -1000(r + e ).(a) Calculate velocity if Y =4000, r =.06, and e =.04.(b) If the money supply (M s ) is 3900, what is the price level? (c) Now suppose the real interest rate rises to 0.11, but Y and M s are unchanged. What happens to velocity and the price level? So if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 4000, what would the inflation rate be?

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