3) The money demand curve is given by the following equation:

Md = 5,000 – 10,000r + 5Y

Md is money demand, r is the real interest rate, and Y is aggregate income.

a) Why does the equation have a negative value for the second term and a positive

value for the third term?

b) Suppose that the equilibrium interest rate is 30% (r = 0.3). Calculate money

demand.

Suppose Y = 5,000. At the existing interest rate, there is an excess (demand/supply) of

money?

c) What will be the new equilibrium interest rate?

d) How much must the money supply increase to restore the original interest rate

(r=0.3)?

e) The required reserve ratio is 10%. How great an open market purchase or sale of

securities should the central bank undertake to restore the original interest rate (i.e.

what is the values of purchase/sale of bonds?

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