Suppose the Real Money Demand Function Is M^d/P = 2400

question 54

Multiple Choice

Suppose the real money demand function is M^d/P = 2400 + 0.2Y - 10,000 (r + π^e) .
Assume M = 5000,π^e = .03,and Y = 5000.If the price level were to decrease from 2.5 to 2.0,then the real interest rate would decrease by how many percentage points (assuming M^d,π^e,and Y are unchanged) ?

• A)4
• B)5
• C)9
• D)14

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