An economy has the following money demand function: (M/P)
d =
0.2Y
i
1/2
.

(a) (3 points) Derive an expression for the velocity of money. What does velocity
depend on? Explain why this dependency may occur.
(b) (2 points) Calculate velocity if the nominal interest rate i is 4 percent.
(c) (2 points) If output Y is 1,000 units and the money supply M is 1,200 USD, what
is the price level P ?
(d) (3 points) Suppose the announcement of a new head of the central bank, with a
reputation of being soft on inflation, increases expected inflation by 5 percentage
points. According to the Fisher effect, what is the new nominal interest rate?