real demand for money (1 Viewer)

[mouse]

help, stuck on this problem:

Assume that the quantity theory of money holds and that velocity is constant at 5. Output is fixed at its full-employment value of 10,000, and the price level is 2.

a) Determine the real demand for money and the nominal demand for money.

b) In this same economy the government fixes the nominal money supply at 5000. With output fixed at its full-employment level and with the assumption that prices are flexible , what will be the new price level? What happens to the price leel if the nominal money supply rises to 6000?

thanks!

 

[Bambul]

I didn't learn about this until 2nd year uni, but here goes:

Fist the answer.

(a)
I. 4,000
II. 2,000
(b)
I. 2.5
II. 3

The important equation to know is:
MV = PY

M = Money supply
V = 5 = Velocity
P = 2 = Price level
Y = 10,000 = GDP

So to work out M we just substitue in:
M*(5) = (2)*(10,000)
M = (20,000)/5
M = 4,000

Assuming we are at equilibrium, demand = supply so nomicla money demand is 4,000. Then we divide by 2 (the price level) to get real money demand (that's 2,000)

Now we have new variables (with price being our dependant variable).
M = 5,000
V = 5
Y = 10,000

So now we solve for P:
(5,000)*(5) = (10,000)*P
P = (25,000)/(10,000)
P = 2.5

If M = 6,000:
(6,000)*(5) = (10,000)*P
P = (30,000)/(10,000)
P = 3

 

[mouse]

cool, the answers that i came out with is similar to yours. i guess were both right.

 

[flyhigh]

is this part of the HSC course? if not, please say so

 

[AGB]

its not...dont worry