2. Money demand in an economy in which no interest is paid on money is M

P Y i 500 0.2 1000.

a. Suppose that P Y CHAPTER 7 | The Asset Market, Money, and Prices 313 100, 1000 = = , and i 0.10.
= Find real money demand, nominal money demand, and velocity.

b. The price level doubles from P P 100 to = = 200.
Find real money demand, nominal money demand, and velocity.

c. Starting from the values of the variables given in Part

(a) and assuming that the money demand function as written holds, determine how velocity is affected by an increase in real income, by an increase in the nominal interest rate, and by an increase in the price level.