Question

An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on check- ing accounts. Recall that the money stock is the sum of currency and demand deposits, includ- ing checking accounts, so this regulatory change makes holding money more attractive. a. How does this change affect the demand for money? b. What happens to the velocity of money?

Answer 1

A)

MV = PY is stable. A growth in interest rate deportment inspection payments makes holding currency extra attractive, which enhance the demand for currency.

B)

The improved demand for currency, interest proportion growths declining the accessibility of currency thus declining the money velocity.

MV = PQ Where M stand as the amount of money, V stands as the money velocity, P stands as price and Q stand for the Quantity output. This indicates that the request for currency is inversely related to velocity. As demand rises velocity declines.