Ive been struggling with the following question for awhile now. It would be nice to get detailed solutions, so I can go over and learn this material.

Thank you.

1. Milton Friedman: Suppose the demand for real money balances is given by the following liquidity function: Md P =1an)=05r*Y a) If the nominal interest rate goes up from 10% to 15%. What will be the percentage change in money demand? Hint: You need to nd the elasticity of money demand with respect to the nominal interest rate: ;_8MKQ i . m Lam E b) Suppose that nominal output goes up by 10%. What is the effect on demand for real money balances? c) What is the velocity of money? Does the quantity theory hold? Why or why not? d) Suppose that the central bank follows a Friedman Rule. This means that they set money growth at a constant rate. Suppose they choose a nominal money growth rate of 2%. Over several decades the average growth rate of nominal GDP is 3% per year and the average change in the nominal interest rate is 0%. The nominal interest uctuates in the short run. 0 What is the average ination rate in the long run? 0 Is the quantity theory a good approximation of price level determination over the long run? What about the short run? 0 Evaluate the statement that by Milton Friedman that \"Inflation is al ways and everywhere a monetary phenomenon.\" Discuss the Classical Dichotomy in your answer. Make use of the following equation: %AM %AP = %AY 2%Az