Chapter 4. Problems 1 and 2

1.You are given the following equation for the real demand for money: (M/P)d = .25Y 50 r

(a)Compute the demand for money for each of the following interest rates when income is equal to $11,940, $12,000, $12,120, and $12,1280:

R= 4.4 r= 4.7 r= 5.0 r= 5.3 r= 5.6 r= 6.2

(b)Given your answers to part a, graph the demand for money curves when income equals $11,940 and income equals $12,180.

(c)Suppose the real money supply, Ms/ P, equals $2,750. Given your answers to part a, find the interest rates and levels of real income at which the money market is in equilibrium. Use these combinations of the interest rate and real income to graph the LM curve, given that the real money supply equals $2,750. Label this curve LM0.

(d)Suppose the real money supply increase to $2,780. Given your answers to part a, find the new combinations to graph the new LM curve, given that the real money supply now equals $2,780. Label this curve LM1.

(e)Suppose the real money supply decreases to $2,720. Given your answers to part a, find the new combinations of the interest rates and real income at which the money market is in equilibrium. Use these combinations to graph the new LM curve, given that the real money supply now equals $2,720. Label this curve LM2.

1.You are given the following equation for the real demand for money: (M/P)d = .25Y 50 r

(a)Compute the demand for money for each of the following interest rates when income is equal to $11,940, $12,000, $12,120, and $12,1280:

R= 4.4 r= 4.7 r= 5.0 r= 5.3 r= 5.6 r= 6.2

(b)Given your answers to part a, graph the demand for money curves when income equals $11,940 and income equals $12,180.

(c)Suppose the real money supply, Ms/ P, equals $2,750. Given your answers to part a, find the interest rates and levels of real income at which the money market is in equilibrium. Use these combinations of the interest rate and real income to graph the LM curve, given that the real money supply equals $2,750. Label this curve LM0.

(d)Suppose the real money supply increase to $2,780. Given your answers to part a, find the new combinations to graph the new LM curve, given that the real money supply now equals $2,780. Label this curve LM1.

(e)Suppose the real money supply decreases to $2,720. Given your answers to part a, find the new combinations of the interest rates and real income at which the money market is in equilibrium. Use these combinations to graph the new LM curve, given that the real money supply now equals $2,720. Label this curve LM2.

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