You are given the following information about the economy of Miniland.
For each 1 TL increase in GDP, the demand for money increases by 25 kuruş, other
things remaining the same. Also, if the interest rate increases by 1 percentage point, the
quantity of money demanded falls by 50 TL. If GDP is 1000 TL:
a) At what interest rate is no money held?
b) How much money is held at an interest rate of 3 per cent?
c) Draw a graph of the demand for money.
Suppose also that the money supply in Miniland is 150 TL.
d) What is the equilibrium in the money market? Find the equilibrium interest
rate, the equilibrium quantity of money demanded and supplied in the money
market. Show it also graphically.
e) If the Bank of Miniland, the Central Bank, wants to lower the interest rate by
1 percentage point, by how much would it have to change the money supply
to achieve this objective? If the money multiplier in this economy is 5, by how
much would the central bank money have to change to achieve this objective?
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