Question

Using the data in the table below, answer the following questions. (Hint drawa graph when possible) Money Demand (billions of dollars) Interest Rate% 12 200 11 220 10 240 260 300 8 360 420 500 600 Assume that the money supply is equal to 260 (do not use % signs in your answers) Number Part 1: What is the equilibrium rate of interest? Number Part 2, Assume that the Bank of Canada buys bonds and increases the money supply to 420 What is the equilbrium rate of interest?

Answer 1

At eqm, money supply = money demand

1) so when M = 260 , so i = 9%

2) when M = 420, then i= 6%

3) when income falls ,then money demand decrease by 60 at every interest rate

So if M = 180, then at i= 10, n

money demand = 240-60 = 180, equals to money supply

i= 10%

4)now money supply = 440, then at i = 5%, n

money demand = 500-60 = 440

So i = 5%

5) increase in income leads to transaction demand for money to increase by 40 at each Interest rate

M= 260, at i= 11%, new money demand = 220+40 = 260

So i = 11%

6) if M = 400, then at i = 7%, new money Demand = 360+40 = 400

i = 7%