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ps_ch23 - Problem Set For Chapter 23 The Money Demand the...

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Problem Set For Chapter 23 The Money Demand, the Equilibrium Interest Rate, and Monetary Policy 1) The demand for money in a country is given by Y r M d + - = 10000 10000 where d M is money demand in dollars, r is the interest rate (a 10 percent interest rate means r =0.1), and Y is national income. Assume Y is initially 5000. a) Graph the amount of money demanded (on the horizontal axis) against the interest rate (on the vertical axis). b) Suppose the money supply ( s M ) is set by the Central Bank at $10000. On the same graph you drew for part a., add the money supply curve. What is the equilibrium rate of interest? Explain how you arrived at your answer. c) Suppose income rises from 5000 to 7500. What happens to the money demand curve you drew for part a.? Draw the new curve, if there is one. What happens to the equilibrium interest rate if the Central Bank does not change the supply of money? d) If the Central Bank wants to keep the equilibrium interest rate at the same value as it was in part b., by how much should it decrease or increase the supply of money, given the
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