One specific real money demand function that fits Canadian banking system data fairly well is: (M/P)^d =i ^-0.1xY

where M is the money quantity, P is the price level, Y is the quantity of output (real GDP) and iis the nominal interest rate. Note that this equation may be written as (M/P)^d=(1/i)^1/10xY.

1. Use a calculator to fill columns 2 and 4 in the table below:

Nominal interest rate i	i-0.1	Real Output Y	Real money demand (M/P)d
0.12 (=12%)		100
0.08		100
0.05		100
0.03		100
0.01		100

Comment your results: What happens to the quantity of real money demand when the nominal interest rate changes, holding the real output constant? Is there a positive or a negative correlation between the nominal interest rate values and the real money demand? How can we explain this correlation?

Now suppose that the real output Y increases to 150. Use a calculator to find the new values for real money demand, holding the nominal interest rate unchanged.

Nominal interest rate i	i-0.1	Real Output Y	Real money demand (M/P)d
0.12 (=12%)		150
0.08		150
0.05		150
0.03		150
0.01		150