Question

Aggregate Demand I - Work It Out: Question 2 Suppose that the money demand function is * = 600 - 757 where r is the interest rate in percent. The money supply M is $1200, and the price level P is fixed at 4. Round answers to one place after the decimal when necessary. a. Graph the supply and demand of real money balances by moving points A and B to graph the demand for money (y' and moving points and D to graph the supply of money (M).

Answer 1

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Solution,

a).

Real money demand = (M/P)d = 600 - 75r

Real Money Supply = (M/P)s = 1200/4 = 300

6 5 4 - 3 2 1 0 0 100 200 300 400 500 600 M/P -(M/P)d (M/P)s

b).

In equibirum,

Money demand equal to money supply

(M/P)d = (M/P)s

600 - 75r = 1200/4

600 - 75r = 300

75r = 600 - 300

75r = 300

r = 300/75 = 4

r = 4%