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Imagine that = c/v, where c is the degree of confidence in the future economy, and v the velocity of money, so that real
Imagine that = c/v, where c is the degree of confidence in the future economy, and v the velocity of money, so that real demand for money L = (c/v)Y/e5R is increasing in economic confidence and decreasing in money's velocity. Suppose that US lockdowns lowered confidence by 5% and velocity of money by 25.3%. Then l'=.95c/.747v = (.95/.747)/ and real demand for money would have risen by ~27.2% as a function. f. In the 2nd quarter of 2020, the Fed increased the money supply by ~16% to M = 17.85 ($trillions) and actual GDP turned out only 8.8% lower at Y = 19.637 (in $trillions, annual rate), while baseline real demand for money had shifted to l'= .95/.747 by assumption. According to the model of the money market, what would have been the equilibrium interest rate, as a percentage to two decimals? g. We learned that, all else equal, if the money supply rises then the equilibrium rate falls. Yet your answers to 1d and 2b should have the interest rate having risen instead. Is there an inconsistency here? State "yes" or "no" and explain why.
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