The Question is :

s r to fall? [flint. V , M is constant.] 8) If transaction velocity doubles at T-4, how would the prices change if the money stock and output remain constant? 3. In an economy where the velocity of money is constant, real output grows by 3 percent per year, the money stock grows by 8 percent per year, and the nominal interest rate is 9 percent. What is the growth rate of nominal output? the inflation rate? the real interest rate? (0.5 point) 4. An economy has the following money demand function: (M/P)-0.2Y/1/2 a. Derive an expression for the velocity of money. What does velocity depend on? Explain why this dependency may occur. b. Calculate velocity if the nominal interest rate i is 4 percent. c. If output Y is 1,000 units and the money supply M is $1,200, what is the price level P? d. Suppose the announcement of a new head of the central bank, with a reputation of being soft on inflation, increases expected inflation by 5 percentage points. According to the Fisher effect, what is the new nominal interest rate? e. Calculate the new velocity of money. f. 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? Explain why this occurs. 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? HARPUR COLLEGE . BINGHAMTON UNIVERSITY