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

question 76

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?

---

Definitions:

Market Price

Market price is the current price at which a security or commodity can be bought or sold in a public market.

Security

A financial instrument representing an ownership position in a publicly-traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option.

Direct Private Long-term Debt Financing

A funding method where businesses borrow money directly from private investors, bypassing traditional bank loans, usually for a period longer than one year.

Public Issues

The offering of securities by a company to the public in order to raise capital.