Q2 Money Demand and Inflation

An economy has the following money demand function:

Md = P0.05[Y/ sqrt(i)]

where i is the nominal interest and is not in units of percent. E.g., if the nominal rate were 5%, then i=0.05

Q2.1

Derive an expression for the velocity of money. Show your work.

Q2.2

Suppose that the nominal interest rate is 9%. What is velocity the velocity of money VV?

Round your answer to at least three decimal places. Do not include commas, dollar signs, or other non-numeric characters in your answer.

Q2.3

If the nominal interest rate is still 9%, output Y is 2,000 units and the money supply M is $1,000, what is the price level P?

Round your answer to at least three decimal places. Do not include commas, dollar signs, or other non-numeric characters in your answer.

Q2.4

Suppose the announcement of a new head of the central bank, with a reputation of being soft on inflation, increases the public's expected inflation rate by 3 percentage points. According to the Fisher effect, what is the new nominal interest rate?

Enter as rate, not percent. Round your answer to at least three decimal places.

Q2.5

If in the aftermath of the announcement, both the economy's output and the current money supply are unchanged, what happens to the price level?

a. Increases

b. Decreases

c. Stays the same

Q2.6

If the new central banker wants to keep the price level the same as it was before the announcement, at what level should she set the money supply?

Round your answer to at least three decimal places. Do not include commas, dollar signs, or other non-numeric characters in your answer.