Question

Money demand in an economy in which no interest is

paid on money is

Md

p == 500 + 0.2Y - 1000i.

a. Suppose that P = 100, Y = 1000, and i = 0.10. Find

real money demand, nominal money demand, and

velocity.

b. The price level doubles from P = 100 to P = 200.

Find real money demand, nominal money

demand, and velocity.

Answer 1

Given:

The money demand is:$p = 500 + 0.2Y − 1,000i$

Now, the P is = 100

Y = 1,000

I = 0.10

Part-A)

• The real money demand, nominal money demand, and velocity:

$Real Money Demand = \frac{MD}{P}\\ = 500 + 0.2Y − 1,000i\\ = 500 + 0.2 (1,000) − 1,000 (0.10)\\ = 500 + 200 − 100\\ = 700 − 100\\ = 600$

$Nominal\space Money\space Demand = Real\space money \space demand × Price\\ = 600 × 100\\= 60,000$

$Velocity:\\ MV = PY\\60,000 × V = 100 × 1,000\\60,000 × V = 100,000\\V = \frac{100,000}{60,000}\\V = 1.66$

Part-B)

• The price level doubles from P = 100 to P = 200, then the real money demand, nominal money demand, and velocity:

$Real Money Demand = \frac{MD}{P}\\ = 500 + 0.2Y − 1,000i\\ = 500 + 0.2 (1,000) − 1,000 (0.10)\\ = 500 + 200 − 100\\ = 700 − 100\\ = 600$

$Nominal\space Money\space Demand = Real\space money \space demand × Price\\ = 600 × 200\\= 120,000$

$Velocity:\\ MV = PY\\120,000 × V = 200 × 1,000\\120,000 × V = 200,000\\V = \frac{200,000}{120,000}\\V = 1.66$