Suppose many demand function is 1000+02y-1000(real money demand+inflation)

Question

1)calculate velocity if y=2000,real money demand=0.06,and inflation is 0.04

Answer 1

To calculate velocity, we need to divide the nominal GDP by the money supply.

Given:
Demand function: 1000 + 0.2y - 1000 (inflation-adjusted money demand)
y = 2000 (real GDP or income)
Real money demand = 0.06
Inflation = 0.04

To find nominal GDP, we need to multiply the real GDP (y) by the price level (1 + inflation):
Nominal GDP = y * (1 + inflation)
Nominal GDP = 2000 * (1 + 0.04) = 2000 * 1.04 = 2080

The money supply is given by the real money demand and the price level:
Money Supply = Real Money Demand * (1 + inflation)
Money Supply = 0.06 * (1 + 0.04) = 0.06 * 1.04 = 0.0624

Now we can calculate velocity by dividing the nominal GDP by the money supply:
Velocity = Nominal GDP / Money Supply
Velocity = 2080 / 0.0624 = 33,333.33

Therefore, the velocity is approximately 33,333.33.