Suppose that the money demand function is (M/P)d = 1,000 - 100r, where r is the interest rate in percent. The money supply M is 1,000 and the price level P is 2. a. Graph the supply and demand for real money balances. b. What is the equilibrium interest rate? c. Assume that the price level is fixed. What happens to the equilibrium interest rate if the supply of money is raised from 1,000 to 1,200? d. If the Fed wishes to raise the interest rate to 7 percent, what money supply should it set?
Suppose that the money demand function is (M/P)d = 1,000 - 100r, where r is the interest rate in percent. The money supply M is 1,000 and the price level P is 2. a. Graph the supply and demand for real money balances. b. What is the equilibrium interest rate? c. Assume that the price level is fixed. What happens to the equilibrium interest rate if the supply of money is raised from 1,000 to 1,200? d. If the Fed wishes to raise the interest rate to 7 percent, what money supply should it set?
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter12: Money Growth And Intlation
Section: Chapter Questions
Problem 2PA
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Question
Suppose that the money demand function is
(M/P)d = 1,000 - 100r,
where r is the interest rate in percent. The
money supply M is 1,000 and the price level P
is 2.
a. Graph the
balances.
b. What is the equilibrium interest rate?
c. Assume that the price level is fixed. What
happens to the equilibrium interest rate if the
supply of money is raised from 1,000 to 1,200?
d. If the Fed wishes to raise the interest rate to
7 percent, what money supply should it set?
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