Reference no: EM132460984

The velocity of money, V, is defined as the ratio of real GNP to real money holdings: V = Y/(M/P) in terms of our standard notation. Use the equilibrium condition that real money demand equals real money supply to show how velocity depends on the interest rate (R) and real income (Y). In particular, show how changes in R and Y affect V. In your answer, assume that real money demand is inelastic with respect to real income (that is, a 1% increase in real income results in an increase in real money demand, but the increase is less than 1%). Continue your analysis to derive a relationship between velocity and the exchange value of a country's currency.