Suppose that the money demand function is

where r is the interest rate in percent. The money supply M is 2,000 and the price level P is fixed at 5.

a. Graph the supply and demand for real money balances.

b. What is the equilibrium interest rate?

c. What happens to the equilibrium interest rate if the supply of money is reduced from 2,000 to 1,500?

d. If the central bank wants the interest rate to be 4 percent, what money supply should it set?

Transcribed Image Text:

(M/P) 800 50r, - : =