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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Definitions:

Other Expenses

Non-operating expenses that do not relate to the main operating activities of the business; they appear in a separate section on the income statement. One example given in the text is Interest Expense, interest owed on money borrowed by the company.

Income Statement

A financial statement that shows a company's revenues, expenses, and net income over a specific period.

Supplies Used

The cost of consumables used in the operation of a business during an accounting period.

Total Liability

The combined amount of debts and obligations that a company owes to outside parties.