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7. Suppose that the money demand function takes the form (M/Pd = L(i, Y) = Y/(5) a. If output grows at rate g, at what rate will the demand for real balances grow (assuming constant nominal interest rates)? b. What is the velocity of money in this economy?

c. If inflation and nominal interest rates are constant, at what rate, if any, will velocity grow? d. How will a permanent (once-and-for-all) increase in the level of interest rates affect the level of velocity? How will it affect the sub- sequent growth rate of velocity?

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Liwen The money dem and tunchon as Si a Te atpuit y grws at rate , hen real meney balances /Pmist also ren that the nominal nterest ratisa Constant. keep in mindl that s long as ioterest rate is cons real meney balancesw same rate as the outpuut icreare at the To Aind the velocity ot mency, stant a14 seunite equati en v=(ey) /m=(Ply the asN ne, nafe that P/ is the invexie eamonay Supply, which is cae to real money demand Thefre , the velocity t meney is vGilyy,ar ds nominal teest rat is constant, hen the velboity t mny murt be Comtart d A one-time increate i the nominal inlerest yato Cause a me-time incrra se tfu velocity ntney. There. w1tbe Her changes in帆e velocity hoful money c

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