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 %

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%