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 = $

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Suppose that the real money demand function is(M/P)^d=800-50r+20y, where r is the interest rate in percent,...

Suppose that the real money demand function is(M/P)^d=800-50r+20y, where r is the interest rate in percent, y is the real income. The money supply is 2,000 and the price level is fixed at 5. a. What is the equilibrium interest rate if real income is fixed at 10? b. What happens to the equilibrium interest rate if the supply of money is reduced from 2,000 to 1500? How will real income change to make the equilibrium interest remain constant? c....

Suppose that the demand function is D(p) = 600 - 3p and the supply function is...

Suppose that the demand function is D(p) = 600 - 3p and the supply function is S(p) = 300 + 3p. 1. Derive the equilibrium price and quantity. 2. What is the change in consumer's surplus after an increase in the price of 50 dollars? 3. Now suppose South Korea is exporting phone to United States and the demand function for Korean phones in the United States is the same as above (in thousands of phones), where p is the...

Assume that money demand function is followed by the equation: ??=100−10?+0.5? Md=Money demand r= interest rate...

Assume that money demand function is followed by the equation: ??=100−10?+0.5? Md=Money demand r= interest rate Y= real income a. In the money demand equation why is the sign of interest rate is negative and the sign of real income is positive, explain. b. If real income is 800 billion TL and interest rate is %10 what is the quantity of money demand? c. If equilibrium interest rate is %5 and real income is constant (Y=800 billion TL) what is...

Suppose that the money demand function takes the form (??)?=?(?,?)=?/5? where ?i is the nominal interest...

Suppose that the money demand function takes the form (??)?=?(?,?)=?/5? where ?i is the nominal interest rate, and ?Y is the real output (income). a. If output grows at a rate of g, and the nominal interest rate is constant, the demand for real balances will grow at a rate of b. What is the velocity of money in this economy? (Note that the equation will be case sensitive. Please use the case indicated by the text.) V = c....

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. Md = 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...

(1)Consider the following estimated model that relates the demand for money (Md) to interest rate (R),...

(1)Consider the following estimated model that relates the demand for money (Md) to interest rate (R), real income (Y) and the lagged money demand (Mt-1 ) ^ ln Mdt = 2.00 – 0.10 ln Rt + 0.70 ln Yt – 0.60 Mt-1 Se (0.10) (0.35) (0.10) R squared = 0.90 DW = 1.80 n = 8 (a)Would it be appropriate to test for first order serial correlation in this model with the “regular” DW test ?...

Suppose a country has a money demand function (??)?=?? where k is a constant parameter. The...

Suppose a country has a money demand function (??)?=?? where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average inflation rate? b. If real income growth were higher, inflation would be c. What is the relationship between the parameter k and the velocity of money? There is no relationship between k and V because the amount of money people hold is...

Draw an IS-MP graph where the macroeconomic equilibrium is at a real interest rate of 6%...

Draw an IS-MP graph where the macroeconomic equilibrium is at a real interest rate of 6% and actual output is 10% below potential GDP. Use this graph to answer the following questions. You’re a financial analyst at a regional bank. In a weekly staff meeting your department head asks your opinion on how Fed policy is going to change in the coming months. If the Fed wishes to close the output gap, how would it change the federal funds rate?...

Suppose the market demand function is as follows: Q=75-6Px + 2Py + 5M where Px is...

Suppose the market demand function is as follows: Q=75-6Px + 2Py + 5M where Px is the price of x, Py is the price of Y and M is income. Currently the price of Y is $75 and income M is $200. Determine the following: i) If the price is $150, what is the quantity demanded? Qd= ii) What is the price elasticity of demand? (in absolute value) iii) At this price, demand is elastic, inelastic or unitary? iv) What...

1. Decompose the liquidity preference demand for money function: Md = Dt(PY) + Da(R). That is,...

1. Decompose the liquidity preference demand for money function: Md = Dt(PY) + Da(R). That is, what are the different reasons we wish to hold money and what are these reasons/demands determined by (or a "function of")? And, in our model of the economy, “where” & how is the equilibrium interest rate determined? 2. Briefly explain with—or without—a bit of maths, why bond prices & interest rates are inversely related.

Subjects