QUESTION ONE

A$.$ Suppose that the money demand function is $(\frac{M}{P}{)}^d=1000-100r,$ where r is the interest rate in percent. The money supply $M$ is$,000$ and the pricertevel$)P$ is $2.$

i$.$ Graph the supply and demand for real money balances.

$[4$ Marks$]$

ii$.$ What is the equilibrium interest rate?

$[2$ Marks$]$

iii. Assume that the price level is fixed. Explain what happens to the equilibrium interest rate if the supply of money is raised from $1,000$ to $1,200?[3$ Marks$]$ iv$.$ If the monetary authorities wishes to raise the interest rate to $7$ percent, what money supply shouldifset?

$[3$ Marks$]$

B$.$ Now consider another hypothetical economy with the following model.

Goods Market

$C=300+0\mathrm{.}75(Y-T)$

$I=200-25r$

$G=80$

$T=80$

Money Market

$(\frac{M}{P}{)}^d=Y-100r$

$M^s=1500$

$P=2$

$\frac{M}{P}d=100-$

$M_{xS}=0$

i$.$ Derive an expression for the IS curve.

$[4$ Marks$]$

ii$.$ Derive an expression for the curve.

$[4$ Marks$]$

$[$TOTAL: $20$ MARKS$]$