Suppose the Money Demand Function Is

question 17

Essay

Suppose the money demand function is
M^D = P × [(0.25 × Y) ? (100 × i)],
where Y is expressed in billions of dollars and i is expressed in percentage points.
a.Suppose that initially P = 2, Y = 5,000, and i = 5.If income rises to 6,000, what is the new equilibrium nominal interest rate?

b.Suppose that initially P = 3, Y = 4,000, and i = 7.If the price level falls to 2, what is the new equilibrium nominal interest rate?

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