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.

Transcribed Image Text:

1 2345 6 7 8 A r 7 6 54 3 2 1 B Yo 1.0 1.5 2.0 2.5 3.0 3.5 4.0 C Y 1.5 2.0 2.5 3.0 3.5 4.0 4.5