1. Suppose that the money demand function is (MP)d=600−75?(MP)d=600−75r where r is the interest rate in...

1. Suppose that the money demand function is

(MP)d=600−75?(MP)d=600−75r

where r is the interest rate in percent.

The money supply M is $1500, and the price level P is fixed at 5.

Round answers to one place after the decimal when necessary.

a. Graph the supply and demand of real money balances by moving points A and B to graph the demand for money (MP)d(MP)d and moving points C and D to graph the supply of money (MP)s(MP)s:

b. Calculate the equilibrium interest rate. The equilibrium interest rate, r, equals:

c. What happens to the equilibrium interest rate, r, if the supply of money is raised from $1500 to $1725?

r =

d. If the central bank wants the interest rate to be 7.0 percent, what money supply should it set? Money supply = $

Expert Solution

Rahul Sunny answered 2 years ago

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