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Macro Problem - Numerical Example with Money Demand and Supply - Find Equilibrium Interest Rate
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In this practice problem, we're given a money demand equation, money supply and the price level, and we're asked to find the interest rates that equilibrates the money market (the market for real money balances). We thus start to get a hint at how central banks might influence interest rates (and the rest of the economy) by changing the money supply. This work eventually leads up to the calculating the LM Curve.
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Suppose the money demand function is
(M/P)^d=1000-100r
where r is the interest rate in percent. The money supply M is 1000 and the price level P is 2.
0:55 a. Graph the supply and demand for real money balances.
3:10 b. What is the equilibrium interest rate?
4:10 c. Assume that the price level is fixed. What happens to the equilibrium interest rate if the supply of money is raised from 1000 to 1200?
5:25 d. If the Fed wishes to raise the interest rate to 7 percent, what money supply should it set?
From Mankiw's Macroeconomics - Chapter 11 (Aggregate Demand Part 1) 8th edition.
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Suppose the money demand function is
(M/P)^d=1000-100r
where r is the interest rate in percent. The money supply M is 1000 and the price level P is 2.
0:55 a. Graph the supply and demand for real money balances.
3:10 b. What is the equilibrium interest rate?
4:10 c. Assume that the price level is fixed. What happens to the equilibrium interest rate if the supply of money is raised from 1000 to 1200?
5:25 d. If the Fed wishes to raise the interest rate to 7 percent, what money supply should it set?
From Mankiw's Macroeconomics - Chapter 11 (Aggregate Demand Part 1) 8th edition.
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