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Consider the following IS-LM model, in which the central bank targets an interest rate of i C 11500.3YD 1 = 2000 + 0.3Y-8000ic) Solve for value of the real money supply that the central bank must set to achieve its interest rate target, and the equil

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Answer #1

Given the target interest rate and money market equilibrium equation; substituting the value of the interest rate gives real money supply.

(M/P) = 4Y-16000i

(M/P)= 4Y-16000(0.02) = 4Y-320

Y can be calculated from the goods market equilibrium

Y= C+I+G

Y= 1150+0.3(Y-1500) + 2000+0.3Y-8000(0.02)+2000

Y=4540+0.6Y

Y=11350

substituting the value of Y in the above money market equation

(M/P)=45080 which also equals money demand as the money market is in equilibrium

C=4105

I=5245

The GDP deflator is a measure of inflation and given M/P = 45080 where M is nominal money supply if P is replaced by money deflator then M=4508000

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