# Purdue Econ 35200 – Suppose That The Money Demand Function

Suppose that the money demand function takes the form (M/P)^d = Y/5i. If output grows at rate g, at what rate will the demand for real balances grow assuming a constant nominal interest rate? I’ve read elsewhere this should just be g if all else remains constant, but it would seem to me the answer should be g/5. If g is 10, and all other values are equal, would the demand for real balances not be 10Y/5i=2y/i — making demand for real balances grow by a factor of 2, or g/5?

# Purdue ECON 35200 – Suppose that the money demand function

Question
Suppose that the money demand function takes the form (M/P)^d = Y/5i. If output grows at rate g, at what rate will the demand for real balances grow assuming a constant nominal interest rate? I’ve read elsewhere this should just be g if all else remains constant, but it would seem to me the answer should be g/5. If g is 10, and all other values are equal, would the demand for real balances not be 10Y/5i=2y/i — making demand for real balances grow by a factor of 2, or g/5?