2. Suppose the money demand function is

M^d/P = 1000 + 0.2Y - 1000 (r + ^e).

(a) Calculate velocity if Y = 2000, r = .06, and ^e = .04.

(b) If the money supply (M^s) is 2600, what is the price level?

(c) Now suppose the real interest rate rises to 0.11, but Y and M^sare unchanged.What happens to velocity and the price level? So, if the nominal interest rate wereto rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, whatwould the inflation rate be?