Question: I am having problem with this question. can you please help me out? (25 points) Suppose that the real money demand function L is given
I am having problem with this question. can you please help me out?

(25 points) Suppose that the real money demand function L is given by L(Y,r + we) = 500 + 0.2Y 1000(1' + are) Where Y is real output, 7' is the real interest rate, and are is expected ination. (a) Suppose that the real interest rate is 3%, real output is 750, expected ination is 5%, and the nominal money supply is M = 28, 500. If the asset market is in equilibrium what are the values of the price level and real money supply? (b) Suppose that the expected ination, the n0niinal money supply, and the price level remain the same from part (b). Derive an expression for the LM Curve. (0) Suppose there is an appointment of a new Central banker who the public believes is going to be tough on inatiOn. If are lowers to 2% and all other terms remain unchanged from (c) what will be the new expression for the LM Curve? (d) Show the shift of the LM Curve graphically with LM denoting the LM curve from part (b) and LM' denoting the LM curve from part (c)
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
