Chapter 1. Chapter 11 – Problem 5

Step 1

Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.

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 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 DYU2tVvtzEQ=%.

Review pages 327-329, along with Figure 11-9, for a discussion of equilibrium in the money market.
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Step 2

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 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 h4XZagboIgc= %.

Review pages 327-330, along with Figure 11-9 and Figure 11-10, for a discussion of equilibrium in the money market. See also the Case Study “Does a Monetary Tightening Raise or Lower Interest Rates.”

Question

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 Y4X9gzy3nmw=

Review pages 327-330, along with Figure 11-9 and Figure 11-10, for a discussion of equilibrium in the money market. See also the Case Study “Does a Monetary Tightening Raise or Lower Interest Rates.”
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