Question 5. Consider an economy in which the money demand function takes the form:(M/P = L (i, Y) = Y/(Si)a. If output grows at rate g, at what rate will the demand for real balances grow(assuming constant nominal interest rates)?b. What is the velocity of money in this economy?c. If inflation and nominal interest rates are constant, at what rate, if any, will velocitygrow?d. (How will a permanent (once-and-for-all) increase in the level of interest rates affectthe level of velocity? How will it affect the subsequent growth rate of velocity?

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose real GDP is forecasted to grow by 2.18%, the velocity of money has been stable, and the Fed announces an inflation target of 2.90%. What is the largest money growth rate the Fed could implement and still achieve its inflation target? Now suppose there is a mid-year revision of the GDP forecast that lowers the expected growth rate below 2.18%. Ceteris paribus, what impact will this lower growth rate have on the rate of inflation? O Inflation will be lower than originally expected. O Inflation will be the same as originally expected. Inflation will be higher than originally expected. Inflation can be either higher or lower than originally expected.
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