Question:

Suppose that the household nominal income for an economy is $50, 000 billion and the demand for money in this economy is given by,M

d

=

$

Y

(

0.2

0.8

i

)

Md=$Y(0.20.8i)

a. What is the demand for money when the interest rate is 1% and 5%?

b. What will be the impact on the demand for money if the nominal income declines by 20%?

c. What is the relationship between the demand for money and income? Money demand and interest rate?

d. Explain what the central bank should do to interest rates if it needs to increase the demand for money.Question:

Suppose that the household nominal income for an economy is $50, 000 billion and the demand for money in this economy is given by,M

d

=

$

Y

(

0.2

0.8

i

)

Md=$Y(0.20.8i)

a. What is the demand for money when the interest rate is 1% and 5%?

b. What will be the impact on the demand for money if the nominal income declines by 20%?

c. What is the relationship between the demand for money and income? Money demand and interest rate?

d. Explain what the central bank should do to interest rates if it needs to increase the demand for money.