Assume That the Demand for Real Money Balance (M/P) Is

question 20

Essay

Assume that the demand for real money balance (M/P) is M/P = 0.6Y - 100i, where Y is national income and i is the nominal interest rate (in percent). The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth.
a. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be?
b. If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must i and P be?

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