A. To graph the supply and demand for real money balances, we can plot the money demand function π/π = 1,000 β 100π and the money supply M = 1,000/2 = 500 on a graph with r on the x-axis and π/π on the y-axis.
B. To find the equilibrium interest rate, we set money demand equal to money supply:
1,000 β 100π = 500
100π = 500
π = 5%
Therefore, the equilibrium interest rate is 5%.
C. If the money supply is raised to 1,200, the new money supply would be 1,200/2 = 600. To find the new equilibrium interest rate, we set money demand equal to the new money supply:
1,000 β 100π = 600
100π = 400
π = 4%
Therefore, the equilibrium interest rate would decrease to 4% if the money supply is raised to 1,200.
D. If the Central bank wishes to raise the interest rate to 7%, we can set the money demand function equal to the new interest rate:
1,000 - 100(7) = 1,200
1,000 - 700 = 1,200
300 = 1,200
M = 600
Therefore, the Central bank should set the money supply to 600 in order to achieve an interest rate of 7%.
3. Suppose that the money demand function is(π/π)
π = 1,000 β 100π, where r is the interest
rate in percent. The money supply M is 1,000 and the price level πis 2.
A. Graph the supply and demand for real money balances.
B. What is the equilibrium interest rate?
C. Assume that the price level is fixed. What happens to the equilibrium interest rate if the
supply of money is raised from1,000 π‘π 1,200 ?
D. If the Central bank wishes to raise the interest rate to 7percent, what money supply should
it set?οΏ½
1 answer
1 answer