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1. Assume that the demand for real money balance (M/P) is M/P = 0.6*Y – 100*i,...

1. Assume that the demand for real money balance (M/P) is M/P = 0.6*Y – 100*i, where Y is national income and i is the nominal interest rate. The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth. [Write 1, not 0.01, for 1 percent in the calculation.]

a. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be?

b. If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must i and P be?

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Rahul Sunny answered 2 years ago
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