Question: Suppose the money demand function is Md / P = 1000 + 0.2 Y - 1000 ( r + e ). a) Calculate velocity if

Suppose the money demand function is

Md/P = 1000 + 0.2Y - 1000 (r + e).

a) Calculate velocity if Y = 2000, r = .06, and e= .04.

b) If the money supply (Ms) is 2600, what is the price level?

c) Now suppose the real interest rate rises to 0.11, but Y and Msare unchanged. What happens to velocity and the price level? If the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?

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