Question

53. Assume that the money demand (function), L(r, Y)Y-100r, where r is the interest rate in percent. The money supply Mis 2,000, Y-2,000 and the price level Pis 2. With the above, at Y 2,000, the (equilibrium) interest rate for the money market equilibrium equation is_ A) 2percent B) 4 C) 6 D) none of the above 54. Assume that the money demand function (or demand for real balances) is: 2,200 200r where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will A) drop by 4 percent. B) drop by 2 percent. C) drop by 1 percent D) remain unchanged

Hi the answer to 53 is D and the answer to 54 is B. I am unsure how to get these answers.

Answer 1

53)

Money market equilibrium is given by

money demand = money supply

L(r,Y) = M/P

Y - 100r = 2000/2

Y - 100r = 1000

Y - 1000 = 100r

Y = 2000

100r = 2000 - 1000

100r = 1000

r = 1000/100

r = 10

so equilibrium interest rate is 10 percent.

54)

Money market equilibrium is given by   

2200 - 200r = 2000/2

2200 - 200r = 1000

2200 - 1000 = 200r  

1200 = 200r

r = 1200/200

r = 6

Now money supply increases to 2800

so 2200 - 200r = 2800/2

2200 - 200r = 1400

2200 - 1400 = 200r  

800 = 200r  

r = 800/200

r = 4

so new equilibrium interest rate drop by 2 percent.

option (B) is correct.