In your economy, the demand and supply of real balances are equal.Now there is a fall in the supply of real balances (due to a FALL in the nominal money supply).

a)In order for equilibrium to be restored, what might occur in the demand for money function (there is a combination of things that could happen)?

Answer:

b)If nothing occurs in the money demand function what must occur in the macro-economy to equate real money balance supply with real money balance demand?

Answer: