To find the velocity, we can use the equation of exchange:
M * V = P * Y
Where:
M = money supply
V = velocity of money
P = price level (inflation)
Y = real GDP
We are given:
Y = 2000
Real money demand = 0.06
Inflation = 0.04
Substituting these values into the money demand function:
1000 + 0.2(2000) - 1000(0.06 + 0.04) = M * V
Simplifying:
1000 + 400 - 1000(0.1) = M * V
1400 - 100 = M * V
1300 = M * V
We don't have the exact value of the money supply, so we can't obtain the exact velocity. However, we do know that the velocity is equal to 1300 divided by the money supply (M).
Suppose money demand function is 1000+0.2y-1000(real money demand+inflation)
What is velocity if y=2000,real money demand is 0.06, and inflation is 0.04
1 answer
1 answer