Question

Assume that the following data characterize the hypothetical economy of Trance: money supply = $190 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? percent.
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.
Quantity of money demanded = $ billion.
of money demanded for transactions = $ billion.
Amount of money demanded as an asset = $ billion.

Answer 1

It is provided that at 12% interest rate, the quantity of money demanded as an asset is $10 billion. This demand increases by $10 billion for each 2% decrease in the interest rate.

Following is the required table -

Interest rate	Money supply (in billions of dollars)	Money demanded for transaction (in billions of dollars)	Money demanded as an asset (in billions of dollars)	Total money demanded (in billions of dollars)
12	190	150	10	160
10	190	150	20	170
8	190	150	30	180
6	190	150	40	190
4	190	150	50	200
2	190	150	60	210
0	190	150	70	220

The quantity of money demanded equals the money supply corresponding to the interest rate of 6%.

Thus,

The equilibrium interest rate in Trance is 6 percent.

(b)

At equilibrium,

Quantity of money supplied = $190 billion

Quantity of money demanded = $190 billion

Quantity of money demanded for transactions = $150 billion

Amount of money demanded as an asset = $40 billion