1 The price level and money demand Suppose the price level in the economy is P. Real money demand L(Y, 1') is the same as we've discussed in lecture. So nominal money demand is as follows, Md = P - L(Y, i) where Y is the real income and t nominal interest rate. 1 1. Given P is the price level1 interpret the economic meaning of a new variable pM = E. 2. Given Y and i, plot the relation between M d and 33M, where pM is on the vertical axis. 3. Adding the money supply curve, M 5 to the graph above. And show the determination of equilibrium Pin- 4. Explain how pf\" responds to an increase in income Y, with the aid of the graph in 3. 5. Piot the relation between M d and interest rate, 3', where interest rate is on the vertical axis. 6. Adding money supply curve to the above graph. And show the determination of equilibrium 1*. 7. Given Y and we assume that price, P, is xed in the short run. Suppose the nominal money supply increases. Show the determination of new equilibrium interest rate, 1"\". Is it lower than i\"? Explain why