Ch. 19: The Demand for Money

Homework VI

1. Assume that the quantity theory holds.
    Suppose that velocity is constant at 5, and that aggregate output Y increases 2% per year from its current level of 1000.
    Calculate:
                a.  The current price level when current money supply is 100.
                b.  The percent changes in the price level (i.e. inflation) if the FED decides to increase money supply by 6% per year.
       

2.  Assume the Baumol-Tobin theory of the transactions demand for money holds.
     Let Y be the periodic level of income.
     Determine the average money holdings for an individual when:
                a. the interest rate on bonds is zero.
                b. the costs of investing in bonds (i.e. brokerage fees and time/energy costs) are zero.
    Explain the logic of your answers.