1.

Real money demand in an economy is:

L = 5000+0,2Y-1000i

Suppose that:

• P = 100

• Y = 1000

• i=0,1

Find: real money demand, nominal money demand and velocity.

Starting from the value of variables given above, determine how velocity is affected by:

• an increase in Y

• increase in i

• increase in P

2.

Mr. Midas has wealth of $ 100,000 that he invests entirely in money (a checking account) and government bonds. Mr. Midas instructs his broker to invest $50,000 in bonds, plus $5000 more in bonds for every percentage point that the interest rate on bonds exceeds the interest rate on his checking account.

Write Mr. Midas money demand function and bond demand function. What is the sum of his demand for money and his demand for bonds?

Suppose that all holders of wealth in the economy are identical to Mr. Midas. Fixed asset supplies per person are $ 80,000 of bonds and $20,000 of checking accounts. Checking accounts pay no interest. What is the interest rate in asset market equilibrium?

3.

Assume that V is constant an equal to 5. Y is fixed at is full employment value of 10,000, and P = 2.

Determine the real demand for money and the nominal demand for money.

4.

Consider an economy with a constant nominal money supply, a real output Y = 100 and a real interest rate r = 0,1. Suppose that income elasticity of money demand is 0,5 and interest elasticity of money demand is -0,1.

1. By what percentage does the equilibrium price level differ from its initial value if output increases by 6% (i.e. to Y = 106)

2. By what percentage does the equilibrium price level differ from its initial value if real interest rate increases to r = 0,11 (i.e. by 10%)

5.

Suppose that real money demand is:

L = 0,01Y/(r+π^e)

where π^e is expected inflation.

Y = 150, r = 0,05

1. Suppose that nominal money supply is growing at the rate of 10% per year and that this growth is expected to persist forever. Currently, the nominal money supply M = 300.. What are the values of the real money supply and the current price level?

2. Suppose that the nominal money supply is M = 300. The central bank announces that from now on nominal money supply will grow at the rate of 5% per year.. What will be the values of real money supply and the price level (assuming that everyone believes this announcement). Explain the effects on the real money supply and the current price level of a slowdown in the rate of money growth.

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