Chapter 4 (Module 3): 10 marks Our end-goal with this question is to derive the expected inflat economy described below. We'll start with the Money Supply and Money Demand curves. MS = 300 MD = P*L(Y-,i.) , where L(Y,i) is known as the Liquidity function The description above says that, all else equal, money demand . changes one-to-one with price level (if the price increas else equal, a person requires 10% more money) is positively correlated with real GDP, Y (though not ne . is inversely correlated with the nominal interest rate Suppose the price level in the economy is 200, real GDP is 81 a is described as L(Y,i) = Yo.5/100i The Supply of Savings curve and Investment Demand curves it described as: S = SDOM + NCI IP = K'-(1-d)K', where Ko is the period's starting level of capit capital requirement, and d is the depreciation rate of capital. The equation for the Investment Demand function above sugg Investment has to compensate for depreciated capital as well; needs going forward. SDOM = 260 + 600r NCI = 200 + 400r K = 725 - 3125r ; K' = 125 ; d = 20% (use d=0.20 in the equati