Quantity theory of money , Econometrics

Suppose an economy has the following Real money demand Function:

L(Y,i) = 1000 + 0.3Y - 4000i,

where   i is the nominal interest rate paid on non-monetary (financial) assets,

P s the nominal price level, Y is real income (GDP),

and monetary assets such as cash earn no interest.

A) For P = 110, Y = 2000 and i = 0.05, find the money market equilibrium levels of real money demand, nominal money demand and the velocity of money (V).  Hint: Think about how the quantity equation helps us to see or determine V. 

B) Assume real income increases by 5% and the nominal interest rate increases by 15% (this does not mean that i jumps by 15 percentage points to 0.20 or 20%).  Find the new equilibrium levels of real money demand, nominal money demand and velocity. 

C) Now assume that Y falls by 10% from part (A) levels, and i falls by 30% from part (A) levels.  Find the new equilibrium level of real money demand, nominal money demand and velocity. 

D) Does the Quantity Theory of Money hold (in any/all time frame(s)) with this real money demand function?  Explain when it does or does not hold AND why this is the case?  Find a functional relationship between Y and i, expressed as a function where Y depends on i (i.e. Y(i) ), such that the Quantity Theory of Money would hold.  (6 points)

Hint: Remember in the QTM the V term is constant.

E) If the central bank influences the nominal interest rate in such a way as to make the Quantity Theory of Money hold true (given your answer in the previous section), then what level of i (as a percentage) would they target in part (B) given they could perfectly foresee the 5% increase in the level of real GDP?  (Hint:  Take the derivative of the Y(i) function with respect to i). 

What would be the new nominal level of money supplied in the economy in the short-run?  If the central bank controls the money supply directly, assuming the economy is in equilibrium with prices stuck at 110, by what percentage would the central bank need to change the nominal money supply to achieve their target level of i?  If prices are fixed in the short-run, what relationship does the Quantity Theory of Money suggest between the equilibrium nominal money supply and the nominal interest rate? 

Posted Date: 2/20/2013 7:18:09 AM | Location : United States

Related Discussions:- Quantity theory of money , Assignment Help, Ask Question on Quantity theory of money , Get Answer, Expert's Help, Quantity theory of money Discussions

Write discussion on Quantity theory of money
Your posts are moderated
Related Questions
Problem: a) In what circumstances would you apply switching models? b) Using dummy variables for seasonality show how you would test for January effects in financial data?

In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI has 50 units of food and 10 units of clothing.

i need help in project

how run ditributed lag model and how select lag length?

Consider the study of the effect of public-sponsored training programs. As argued in public programs of training and employment are designed to improve participant's productive ski

usefulness of time series in a business with a detailed explanation

The following regression was estimated to explain the inflation rate in the USA.  The data set contains annual observations from 1970 to 2010.       Inft  =  2500 +   50*Xt  +

hypothetical data on consumption expenditure ($) and income ($) is given in the table x Y 80 55 100 65 85 70 110 80 120 79 115 84