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##### Consider a money demand function that takes the form (M/P)d = Y/3i, where M is the quantity of money

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1. Consider a money demand function that takes the form (M/P)d = Y/3i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate (measured in percentage points).;a. What is the velocity of money if the nominal interest rate is constant?;b. How will the level of the velocity of money change if there is a permanent (one time) increase in the nominal interest rate, holding other factors constant?;2. Consider the following Neoclassical model of the economy, where the domestic interest rate (r) and the world interest rate (r*) are in percentage terms. show all your work.;Y=1000,C=50+0.7(Y-T), NX=100-100?,I=200-10r,r*=5%,G=200,T=100;a)find the equilibrium real interest rate,national saving,and investment in a closed economy.;b)now assume the small economy opens up to trade.calculate the real exchange rate,trade balance and net capital outflow.;c)assume that contractionary fiscal policymakers enacted by reducing government spending to 100. find the new real exchange rate,trade balance and net capital outflows.

Paper#15677 | Written in 18-Jul-2015

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