Use the data in Problem 7 to work this problem. The interest rate is 4 percent a
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Use the data in Problem 7 to work this problem. The interest rate is 4 percent a year. Suppose that real GDP decreases from $20 billion to $10 billion and the quantity of money remains unchanged. Do people buy bonds or sell bonds? Explain how the interest rate changes.
Problem 7
The spreadsheet provides data about the demand for money in Minland. Columns A and B show the demand for money schedule when real GDP (Y0) is $10 billion, and Columns A and C show the demand for money schedule when real GDP (Y1)
is $20 billion. The quantity of money is $3 billion.
What is the interest rate when real GDP is $10 billion? Explain what happens in the money market in the short run if real GDP increases to $20 billion.
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