Inflation - Work It Out: Question 2 Consider an economy with the money demand function is Round answers to two places after the decimal when necessary. a. Identify the correct expression for the velocity of money. @ Macmillan Learning OV =xi Ov =xi OV =5yxi Ov =5xi b. Calculate velocity if the nominal interest rate (i) is 4 percent. Velocity = 20 C. Assume output (Y) is 5000 units and the money supply (M) is $500. Calculate the price level (P). Price level =Stacked Inflation - Work It Out: Question 2 Consider an economy with the money demand function is m X Round answers to two places after the decimal when necessary. d. Suppose the announcement of a new head of the central bank, with a reputation as a tough inflation fighter, reduces expected inflation by 2.0 percentage points. According to the Fisher effect, what is the new nominal interest rate? @ Macmillan Learning New nominal interest rate: e. Calculate the new velocity of money. New velocity of money:Stacked Inflation - Work It Out: Question 2 Consider an economy with the money demand function is X : Round answers to two places after the decimal when necessary. f. Assume in the aftermath of the announcement, both the economy's output and the current money supply are unchanged. @Macmillan Learning Calculate the new price level. Price level = The decline in the nominal interest rate the opportunity cost of holding money, leading to in the demand for real money balances. g. If the new central banker wants to keep the price level the same after the announcement, at what level should she set the money supply? Money supply = $