Suppose that the economy has a money demand function given by M^d = 4000 + 0.6Y -
Fantastic news! We've Found the answer you've been seeking!
Question:
Suppose that the economy has a money demand function given by M^d = 4000 + 0.6Y - 80r, 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 10000. Suppose that the economy is initially in equilibrium at r = 0.03.
(a) Determine the equilibrium level of real income in the economy.
(b) Suppose that the central bank decides to decrease the money supply by 2000. Calculate the new equilibrium level of real income in the economy.
(c) Calculate the percentage change in real income resulting from the decrease in the money supply.
Related Book For
Macroeconomics
ISBN: 978-1464168505
5th Canadian Edition
Authors: N. Gregory Mankiw, William M. Scarth
Posted Date: