Q$.2.$ Recalling Fisher equation $(MV=PT),$ we defined the velocity of money as the ratio of

nominal expenditure to the quantity of money. Let's now use the Baumol$-$Tobin model to

examine what determines velocity. $(10)[$CO$2]$

a$.$ Recalling that average money holdings equal $\frac{Y}{2N},$ write velocity as a function of the

number of trips to the bank $N.$ Explain your result.

b$.$ Use the formula for the optimal number of trips to express velocity as a function of

expenditure $Y,$ the interest rate $i,$ and the cost of a trip to the bank $F.$

c$.$ What happens to velocity when the interest rate rises? Explain.

d$.$ What happens to velocity when the price level rises? Explain.

e$.$ As the economy grows, what should happen to the velocity of money? $($Hint: Think

about how economic growth will influence $Y$ and $F.)$

solve with proper equations