Solution for Assignment 5

2. Suppose that the money demand function is (

MP

)

d

= 1000 100r

where r is the

interest rate in percent. The money supply M is 1000 and the price level P is 2. a) Graph the

supply and demand for real money balances.

b) What is the equilibrium interest rate?

c) Assume that the price level is fixed. What happens to the equilibrium interstate if the supply of money is raised from 1000 to 1200?

)

)

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