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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 fixed at 2.

a & b. Below is the graph of supply and demand for real money balances.

What is the equilibrium interest rate?

The equilibrium interest rate, r, equals %.

Review Section 10-2, along with Figure 10-9, for a discussion of equilibrium in the money market.
Review Section 10-2, along with Figure 10-9, for a discussion of equilibrium in the money market.
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      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 fixed at 2.

      c. What happens to the equilibrium interest rate if the supply of money is raised from 1,000 to 1,200?

      The equilibrium interest rate, r, equals %.

      Review Section 10-2, along with Figure 10-9 and Figure 10-10, for a discussion of equilibrium in the money market.

      d. If the central bank wants the interest rate to be 7 percent, what money supply should it set?

      The central bank should set the money supply equal to

      Review Section 10-2, along with Figure 10-9 and Figure 10-10, for a discussion of equilibrium in the money market.
      Review Section 10-2, along with Figure 10-9 and Figure 10-10, for a discussion of equilibrium in the money market.
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