Suppose you are given the following information:

Real money demand function: L(i, Y) = 0.25Y -200i

Output: Y = 8000

Money supply: MS = 3200

Note: Both nominal and real interest rates and inflation rate are measured in percentage points (i.e., if r = 5, then r = 5%).

Q1. "If the equilibrium real interest rate (r) is fixed at 4% and expected inflation is 2%, then the real money balance is 800." True/False/Uncertain, explain. (4 points)

Q2. Find the level of (nominal) money supply if the central bank wants to keep the price level to 5. What happens to the real money balance? Explain. (6 points)