Question: Suppose that the economy has a money demand function given by M^d = 4000 + 0.5Y - 100r, where M^d is the demand for money,

Suppose that the economy has a money demand function given by M^d = 4000 + 0.5Y - 100r, where M^d is the demand for money, Y is real income, and r is the nominal interest rate. The money supply is fixed at 8000. Suppose that the economy is initially in equilibrium at r = 0.05.

(a) Determine the equilibrium level of real income in the economy.
(b) Suppose that the central bank decides to increase the money supply by 1000. Calculate the new equilibrium level of real income in the economy.
(c) Calculate the percentage change in real income resulting from the increase in the money supply.

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