Question 22 to 2S: Suppose the central bank money supply is 100 trillion dollars. For each dollar,households want to hold it in 20 cents cash and 80 cents of checkable deposits. The government requires a reserve ratio of 10%. The nominal GDP is 100 trillion dollars. The money demand function is written as Md =

$Y L(i) where $Y is the nominal GDP and L(i) = 1/(0.2 + i).

22. (3pt) Use the money demand function to explain money demand is an increasing function in nominal GDP and a decreasing function in interest rate i.

23. (3pt) What is the currency demand by the households. Please write it as an expression of the interest rate, i.

24. (3pt) What is the reserve demand by the commercial banks. Please write it as an expression of the interest rate, i.

25. (3pt) Recall: central money demand = currency demand by the households + reserve demand by the commercial banks. Use this central money market equilibrium condition to compute the equilibrium interest rate.