1.If velocity and aggregate output remain constant at 5 and 1000, respectively, what happens to the price level if the money supply declines from $400 billion to $300 billion?
2 and 1000, respectively, what happens to the price level if the money supply declines from $400 billion to $300 billion?
3. Suppose that the demand for money is given by
Log(M/P)= α +βi + logY
where M is nominal balances, P the price level, i the nominal interest rate, and Y is real income. a and b are parameters.
a. Explain how a constant rate of increase in the price level affects the demand for money.
b. What is the definition of the velocity of money? Use the concept of velocity to explain how a given quantity of money balances can be used to pay for a relatively large volume of consumption expenditure over a year.