5. 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?