Question
4. Suppose that the stock of money in Iran's economy is given by the sum of currency and demand for current accounts that do not
4. Suppose that the stock of money in Iran's economy is given by the sum of currency and demand for current accounts that do not pay any interest rate ( so this represents the amount of money that people can hold in a given period).Suppose a change in government regulations that allows banks to start paying interest on current accounts. a) How does this change in regulation affect the demand for money? (Hint: Use the money demand derived from the quantity theory. Assume that the velocity is not constant but independent on the interest rate). b) What happens to the velocity of money? c) If the Central Bank keeps the money supply constant, what will happen to output and prices in the short run and in the long run ? (Hint: Now use the aggregate demand derived from the quantity theory. Draw it in the same graph with horizontal and a vertical aggregate supply).
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