Quiz #7 (answers)
ECNS 303
Name________________________
1.) Suppose the money demand function is
(M/P)d = 400 – 35r,
where r is the interest rate in percent. The money supply M is 550 and the price level P is 5.
a.) Graph the supply and demand for real money balances. Label your graphs and axes!
(M/P)s
Interest rate, r
11.4
(M/P)d
110
400
Real money
balances, M/P
b.) What is the equilibrium interest rate?
550/5 = 400-35r
=>
110 - 400 = -35r
=>
35r = 290
=>
r* = 8.29%
c.) If the Fed wishes to raise the interest rate to 9 percent, what money supply should it set?
M/5 = 400 - 35(9)
M = 5(85)
M = 425