The velocity ofmoney, V, is defined as the ratio of real GNP to real moneyholdings,V=Y/(M/P) in thischapter's notation. Use Ms/P=L(R,Y) to derive an expression for velocity.

Using Ms/P=L(R,Y), velocity can be expressed as V=

.

Explain how velocity varies with changes in R and in Y. (Hint: The effect of output changes on V depends on the elasticity of aggregate money demand with respect to realoutput, which economists believe to be less thanunity.)

A.

An increase in R will increasevelocity, while an increase in Y will leave it unchanged.

B.

An increase in either R or Y will increase velocity.

C.

An increase in either R or Y will decrease velocity.

D.

An increase in R will increasevelocity, while an increase in Y will decrease velocity.

What is the relationship between velocity and the exchangerate?

A.

There is a negative relationship. Thus, an increase in velocity is associated with an appreciation of the exchange rate.

B.

There is a negative relationship. Thus, an increase in velocity is associated with a depreciation of the exchange rate.

C.

There is a positive relationship. Thus, an increase in velocity is associated with an appreciation of the exchange rate.

D.

There is a positive relationship. Thus, an increase in velocity is associated with a depreciation of the exchange rate.