Suppose that money demand is given by:

= $ (0.85 )

where $Y is $100. Also, suppose that the supply of money is $80.

a) What is the equilibrium interest rate? Please start your derivation from the equilibrium

condition of the financial markets.

b) Due to COVID, the Bank of Canada wants to lower the market interest rate by 2% (e.g., from

5% to3%), how doyou expect themoney supply inCanada to change?Please show your

calculation.

c) Suppose that the money supply is at the new level in Question b). As the economy gradually

recovers, households'nominal income ($Y) increases to$110. Does thischange have an

upward or downward pressure on the equilibrium interest rate compared with the level in b)?

Please explain your conclusion in words.

d) Illustrate in a graph the effect in Question c). Clearly show the movements of/on the curves

and label the new financial market equilibrium.