Question

Assume that the following data characterize the hypothetical economy of Trance: money supply = $200 billion, quantity of money demanded for transactions = $150 billion, quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate. Instructions: Enter your answers as whole numbers. a. What is the equilibrium interest rate in Trance? b. At the equilibrium interest rate, what are the quantity of money supplied, the total quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance? Quantity of money supplied = billion billion Quantity of money demanded = billion Amount of money demanded for transactions = billion Amount of money demanded as an asset =

Answer 1

a) We construct a table as follows:
The first column is the interest rate. The second column is the quantity of money demanded as an asset at each rate. The third column is the quantity of money demanded for transactions, which is independent of the interest rate. The fourth column is the actual (total) quantity of money demanded at each interest rate, which is the sum of columns 1 and 2. The fifth column is the quantity of money supplied at each interest rate.

We find the equilibrium interest rate by equating the quantity supplied with the quantity demanded, which occurs at the interest rate of 4 percent.

So, answer is 4.

b) It also follows from the answer above that the equilibrium quantity of money supplied is $200 billion
and the equilibrium quantity demanded is $200 billion.

Decompose the quantity demanded into its separate components, where the amount of money demanded for transactions is $150 billion and the amount of money demanded as an asset is $50 billion.

So, the answers are:

200

200

150

50

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