Suppose that themoney demand functionis

(M/P)^d= 1000 100r,

whereris the interest rate in percent. The money supplyMis 1,000 and the price levelPis fixed at 2.

a.Graphthe supply and demand for real money balances.

b.What is the equilibrium interest rate?

c.What happens to the equilibrium interest rate if the supply of money is raised from 1,000 to 1,200?

d.If the central bank wants the interest rate to be 7 percent, what money supply should it set?

e.Show your results for b, c, and d in your graph.