Question

A standard "money demand" function used by macroeconomists has the form ln( ) = + ln( ) + m β , 0 β1 GDP β2R Where m is the quantity of (real) money, GDP is the value of (real) gross domestic product, and R is the value of the nominal interest rate measured in percent per year. Supposed that = and = . β1 2.34 β2 − 0.06 What is the expected change in m if GDP increases by %?5 The value of m is expected to (1) by approximately %. (Round your response to the nearest integer ) What is the expected change in m if the interest rate increases from % to %?3 9 The value of m is expected to (2) by approximately %

Answer 1

Answer:

1.The money demand will rise by 1.154%

2. The money demanded will fall and for a 1% increase in interest , the money demanded will fall by 0.38%

Explanation:

1. Money demand function

ln(m) = β0 +β1 ln(GDP)+β2R

Suppose β1 = 1.5 , β2 = −0.04 , GDP = $ 100 & R = 3%

ln(m) = 1.5 ln ($100) - 0.04 X 0.03

ln(m) = 6.91

m = 1002.247

Suppose the GDP increases by 1%; the new GDP will be = $ 101  

ln(m) = 1.5 ln ($101) - 0.04 X 0.03

ln(m) = 6.92

m = 1013.81

If the GDP increases by 1% ,the money demand will rise by 1.154%

2.

If the interest rate increases from 3% to 4%

ln(m) = 1.5 ln ($100) - 0.04 X 0.04  

ln(m) = 6.906155

m = $ 998.400

If the interest rate rises from 3% to 4% , the money demanded will fall and for a 1% increase in interest , the money demanded will fall by 0.38%