Question

please have a detail process

D. Suppose the money demand is given by: (15 marks) Md = $Y (0.24 – i) where $Y is $300. Also, suppose that the supply of money is $60. Assume equilibrium in financial markets. 1. Find Md for i = 4% and i = 9%? (6 marks) 2. Graph Md and M$ and calculate the equilibrium interest rate? (6 marks) 3. If the Bank of Canada wants to increase i by 10% (from, say, 4% to 14%), at what level should it set the supply of money? (3 marks)

Answer 1

a)

Given M^d=Y*(0.24-i)

Put Y=300

M^d=300*(0.24-i)=72-300i

Let us calculate M^d for i=4%. Set i=0.04

M^d=72-300i=72-300*0.04=$60

Let us calculate M^d for i=9%. Set i=0.09

M^d=72-300i=72-300*0.09=$45

b)

i	Md=72-300*i	Ms
0%	72	60
4%	60	60
10%	42	60
17%	21	60
24%	0	60

4%, 60 Md Ms 0% 4% 8% 20% 24% 12% 16% Interest rate, i

For equilibrium M^d=M^s

72-300i=60

i=4% (Equilibrium interest rate)

c)

If interest rate is to hiked to by 10% i.e. 4% to 10%

M^d=72-300i=72-300*0.14=$30

In equilibrium M^d=M^s, So,

Money supply should be set at $30