6. Suppose the money demand function is
Md/P = 1000 + 0.2Y – 1000 (r + πe). (a) Calculate velocity if Y = 2000, r = .06, and πe = .04.
(b) If the money supply (Ms) is 2600, what is the price level?
(c) Now suppose the real interest rate rises to 0.11, but Y and Ms are unchanged. What happens to velocity and the price level? So if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?