Question

Question 2: Money market Suppose that the money demand function is (M/P) = 0.75 Y - 200r The money supply M is 6000 and the price level is 2. a. Graph the supply for real money balances on a new graph (label it "figure 3"), and label the supply of real money balances (M/P).

Answer 1

The IS curve equation is not provided , neither any information on goods market, so part d and e are answered in terms of variables for which values can be substituted given a data set.

Money demand: Md . Mjd = 0.757-2008: M-6000 / P-2. rtical twe a vertical is supply of real balances Na ů 1 3000 demand & supply op nat balans. Y=6000 TABLE 1: I | M/P) da 0 Y I 6000 | 6000 16000 r 22 15 75 1500 3000 (6) My d = 0.754 - 2008 0.75 (6000) - 200 (225) (121729 - 0.95 (6000) -200 (15) - 1500

Date/ DELTA PO NO in my d= 0.75 (6000) - 200 (75) = 3000 , Money demand curue: uonia me tabee we see the na relationship between mal unterest rate & caypd is negatire ! m p BTP). 22:5 FO (M/P) du 1500 3000 dd & ss of real troch balantti The equilibrium interest rate is the pourt where intersect at intersect at pou pourt to where in the - curues too Tre curues 75)

DELTA Y=8000 i Mid = 0.75(8000) - 200 30) P7 = 0-75 (8000) - 2001 2205) = 1500 T ! megal = 0.75 (8000) - 200(75) = 3000, TABLE 2 LY I I (M ) da 8000 r 30 22-5 is 8000 1500 8000 3000 r of (m/es 15 - - - - 75 -- D Paz MO 3000 dd & ss. of real money balances The mal demand a supply intersects at for mony point E.

Date/ DELTA PO NO me equilibrum interest rate where (M)=Md2 - - r * = 15 - At y = 6000 r *= 7.5 458000, rz* = 15. LM curue is represents combinations of y&r for which the money market is in equilibrium 6000 8000 Y IS curue is not provided the equilibrim yar will be a point where is a2m curves intersect. AG=20t. ie 0.26. when G Micreases he is curue shifts right rowerment multiplier - AY AG = 1 = dlą. 1-C when there is not tax rate.

a. the is curne shifts outward by me amoult AY=FAG..G. | (26.10.24 The new equilibrum is at intersection of 1524LM, (Note the equilibrium income doesn't change by full am of multipher as there is some crowding out ). amoun 152 is, is You Ye*