The income elasticity of money demand is 2/3 and the interest elasticity of money demand is -0.1. Real income is expected to grow by 4.5% over the next year, and the real interest rate is expected to remain constant over the next year. The rate of inflation has been zero for several years.

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lcoley8 lcoley8 · Answer 1 · 2020-04-26T17:07:06+02:00

Answer:

Incomplete question:

a) If the central bank wants zero inflation over the next year, what growth rate of the nominal money supply should it choose?

b) By how much will velocity change over the next year if the central bank follows the policy that achieves zero inflation?

Answer:

a) The growth rate of the nominal money supply should be 3%

b) If the central bank follow the zero inflation policy, the speed would be 1.5%

Explanation:

please look at the solution in the attached Word file

PiaDeveau PiaDeveau · Answer 2 · 2021-12-01T11:45:42+01:00

Growth rate of nominal Supply is 3%

Given that;

Income elasticity of money demand = 2/3

Interest elasticity of money demand = -0.1

Real income expected to grow = 4.5%

Find:

Growth rate of nominal Supply

Computation:

Inflation rate = Growth rate - [Income elasticity of money demand × Real income expected to grow]4.5%

0 = Growth rate - [2/3 × - 1]4.5%

Growth rate of nominal Supply = 3%

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