Suppose that aggregate demand in the economy is described by the following equation: MI yd = kP Where M is the money supply, P is the price level and k = 1/V (velocity of money). Explain carefully where this equation is derived from and its interpretation.

Suppose that aggregate demand in the economy is described by the following equation: MI yd = kP Where M is the money supply, P is the price level and k = 1/V (velocity of money). Explain carefully where this equation is derived from and its interpretation.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose that the economy's long-run output level is produced according to the following
production function:
Y = AK1/2L1/2
and that A = 5, K = 400 and L = 100.

Suppose that aggregate demand in the economy is described by the following
equation:
yd_MkP
M/
=
Where M is the money supply, P is the price level and k = 1/V (velocity of money).
Explain carefully where this equation is derived from and its interpretation.

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