For the money demand function, we assumed that money demand depends on income and interest rate....

For the money demand function, we assumed that money demand depends on income and interest rate. Consider an economy where money demand does not depend on income and is only a function of interest rate.

M^d = L(i)

Suppose that the economy is open and on a flexible exchange rate:

(a) Draw the money demand and supply curves with money demand and supply on x-axis and interest rate on y-axis.

(b) Show what happens to money demand and supply curves if income changes.

(c) Derive the LM curve.

(d) Derive the AD curve.

Expert Solution

Rahul Sunny answered 7 months ago

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