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(14 points) Assume that the demand for real money balance (M/P) is M/P = 0.6Y - 10000i, where Y is national income and i is

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(14 points) Assume that the demand for real money balance (M/P) is M/P = 0.6Y - 10000i, where Y is national income and i is the nominal interest rate (for example, if Y = 2000 and i = 3%, then 0.6Y - 100002 = 1200 - 10000 x 0.03 = 900). The real interest rate r is fixed at 3 percent by the investment and saving functions. The inflation rate equals the rate of nominal money growth. 1) If Y is 1, 000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be? (7 points) 2) If Y is 1, 000, M is 100, and the growth rate of nominal money is 2 percent, what must i and P be? (7 points)

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