4. (goods market and money market) Consider the following short-run model of a close economy Y=150...

4. (goods market and money market) Consider the following short-run model of a close economy Y=150 C=40+0.5(Y - T) I=30-5r G=25, T=20 a. Find the real interest rate that produces equilibrium in the goods market (For example, if real interest rate is 4%, then r=4). Then use a saving-investment diagram to show how the equilibrium interest rate is predicted to change if President Trump builds "the wall" between Mexico and the U.S. (4%) b. Suppose that the inflation rate equals 4%. The money demand function is given by Md = Y - 10i where i is the nominal interest rate in percentage term (For example, if nominal interest rate is 3%, then i=3). Find the money supply at the equilibrium. How does the equilibrium change if the risk of non-money asset goes down? (4%) c. Assume that the velocity of money is constant and real GDP is growing at 1%. If the Fed wishes to keep the price level constant, how much (in dollars) do they need to increase the money supply? (4%)

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Rahul Sunny answered 1 year ago

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