1. Suppose that real money demand is given by the function (M/P)d= Y/6i and real money supply is given by the function (M/P), whereYis real GDP,iis the nominal interest rate, andPis the overall price level.

a) (4 points) Assume that output (Y) is 3000 units, the money supply (M) is $350, and the nominal interest rate (i) is 2 percent. Using the quantity theory of money, calculate the velocity of money (V) and the price level (P). [Round to 2 decimals if necessary]

b) (3 points) Suppose actions by Congress cause the real interest rate toincreaseby 2 percentage points. Using the Fisher equation, how would the demand for liquidity (money) change? Explain your reasoning.

c) (3 points) What action can the Federal Reserve take to return the nominal interest rate back to the original value in part (a)? Explain your reasoning.