Exercise 3 The following exercise examines the relationship between monetary policy and changes in aggregate demand Table 15.3 Money supply and demand for money Nominal interest rate Money demand Supply of money (% per year) ($ billions) ($ billions) 320 240 280 240 240 240 200 240 On the basis of Table 15.3, answer the indicated questions. Assume for every 1 percentage point decline in the interest rate, aggregate spending shifts upward by $20 billion. 1. In Table 15.3, the equilibrium interest rate is percent per year. 2. If the interest rate in Table 15.3 is 8 percent, then there is a (surplus, shortage) of money, and the interest rate will (rise, fall, remain constant). 3. If the anticipated inflation rate is 4 percent, then at the equilibrium nominal interest rate in Table 15.3, the real interest rate will be percent per year. 4. If the real rate of interest is negative then, ceteris paribus: (a) The nominal interest rate is negative. ( b ) Monetary policy is tight. (C) The inflation rate is negative. (d) It pays to borrow. 206