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Unformatted text preview: supply increases from 1000 to 1200, while the price level remains constant? Money Supply = Money Demand (M/P) s = (M/P) d (1200 / 2) = 1000 100 r 600 = 1000 100 r -400 = - 100 r 4 = r The new equilibrium interest rate is now 4%. Does this make sense? Well, if the nominal money supply is increased, ceteris paribus, you would expect the real interest rate to drop. This gives a result consistent with the theory....
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- Spring '09