Within the Cambridge form of the quantity theory, the demand for money is given by
Md = kPY
Suppose that income (Y) is given at 300 units and the money supply (M) is fixed at 20(1 units. Also suppose that the value of k initially is 1/4; initially, individuals wish to hold money balances equal to one-fourth of their income. Then assume that individuals increase the money demand to one-third of their income; k rises to 1/3.
How does this increase in money demand affect the equilibrium value of the aggregate price level (/>)? What was the initial equilibrium price level? What is the value after the increase in money demand? Explain the process that leads to the change in the aggregate price level.