Suppose that a change in government regulations allows banks to start paying interest on checking accounts. The money stock is the sum of currency and demand deposits, including checking accounts. (a) How does this change affect the demand for money? (b) What happens to the velocity of money? (c) What will happen to the LM curve? (d)If the price level is fixed, what will happen to the output and interest rate? Use the IS-LM framework to explain your answer.
This was the question given. According to my understanding: (a) interest on checking accounts means lower cost of holding money so money demand goes up. (c)Since demand for money has gone up interest rate will go up, hence LM curve shifts to the left. (d) due to the leftward shift of LM curve interest rate go up and output goes down. Are my answers correct? How do I insert velocity of money in ISLM model?