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For simplicity, we hold the price level fixed at 1 and assume that inflationary expectations are...

For simplicity, we hold the price level fixed at 1 and assume that inflationary expectations are fixed at 2%.

Initial Conditions before the fall of 2008

mm = money multiplier = 1.6

MB = monetary base = 900

Money Demand

Md = P X [ a0 + .5 (Y) - 200 (i) ]

Md = 1 X [ 200 + .5 (3600) - 200 (i) ]

Solve for the money market clearing rate of interest (show your work on your exam sheet). Now draw a money market diagram labeling this initial equilibrium in the money market as point A on your exam sheet.

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