Question: Suppose the money demand function is (M/P) d = 800 5r, where r is the interest rate in percent. The money supply M is 2,000

Suppose the money demand function is (M/P)^d = 800 5r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is fixed at 5. a. Calculate the equilibrium interest rate. What is the equilibrium real money balances? b. Suppose the money supply falls to 1500. What happens to the equilibrium interest rate? c. Return to the original specification of the model with the money supply equal to 2000. Suppose income falls. What effect does this have on the equilibrium level of real money balances and the interest rate? Why is this the case?

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