Q1. Suppose that the real money demand function is

L( Y , r + e ) =0.01 Y/( r + e )

where Y is real output, r is the real interest rate, and It' is the expected rate of inflation. Real

output is constant over time at Y = 150. The real interest rate is fixed in the goods market at r =

0.05 per year.

A)Suppose that the nominal money supply is growing at the rate of 10% per year and that this growth rate is expected to persist forever. Currently, the nominal money supply is M = 300. What are the values of the real money supply and the current price level?

B)Suppose that the nominal money supply is M = 300. The central bank announces that from now on the nominal money supply will grow at the rate of 5% per year. If everyone believes this announcement, and if all markets are in equilibrium, what are the values of the real money supply and the current price level?

Q2. Desired consumption and investment are

Cd =4000 - 4000 r + 0.20 Y

Id = 2400 - 4000 r.

As usual, Y is output and r is the real interest rate. Government purchases, G, are 2000.

A). Find an equation relating desired national saving, Sd, to rand Y.

B). What value of the real interest rate clears the goods market when Y = 10,000? Use both forms of the goods market equilibrium condition. What value of the real interest rate clears the goods market when Y = 1O,200?

C). Graph the IS curve.