1. If the quantity of money is $4 trillion, what is the supply of money and the nominal interest rate?

2. If the quantity of money is $4 trillion and real GDP increases, how will the interest rate change? Explain the process that changes the interest rate.

3. If the quantity of money is $4 trillion and the Fed decreases it to $3.9 trillion, how will the price of a bond change? Why?

4. If banks increase the interest rate they pay on deposits, how will the demand for money and the nominal interest rate in the money market change?

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FIGURE 1 Nominal interest rate (percent per year) 8 6 4 2 MD 0 3.9 4.0 4.1 4.2 Quantity of money (trillions of dollars)