Question #48147

r =1.5 + 0.75 π
1. Using the formula from above, what is the Aggregate Demand function?
2-Suppose real money demand is describe by equation L(i,Y) = 8 - 2i + 0.5Y and assume that income is Y = $10 billion and real money supply is $7 Billion. What is the money demand formula?
3-What is the equilibrium (nominal interest rate?
4-If the central bank increases the real money supply to $4 billon calculate the new interest rate?

Expert's answer

1. Aggregate demand (AD) is the total demand for final goods and services in an economy at a given time.

AD = C + I + G + NX

2. Real money demand L(i,Y) = 8 - 2i + 0.5Y, Y = $10 billion, real money supply MS = $7 Billion.

L = MS, so:

8 - 2i + 0.5*10 = 7

The money demand formula is L = 8 - 2i + 5

3-What is the equilibrium (nominal interest rate?

L = MS, so:

8 - 2i + 0.5*10 = 7

2i = 6,

i = 3%

4. If the central bank increases the real money supply to $4, the new interest rate will be:

8 - 2i + 5 = 4

2i = 9

i = 4.5%

AD = C + I + G + NX

2. Real money demand L(i,Y) = 8 - 2i + 0.5Y, Y = $10 billion, real money supply MS = $7 Billion.

L = MS, so:

8 - 2i + 0.5*10 = 7

The money demand formula is L = 8 - 2i + 5

3-What is the equilibrium (nominal interest rate?

L = MS, so:

8 - 2i + 0.5*10 = 7

2i = 6,

i = 3%

4. If the central bank increases the real money supply to $4, the new interest rate will be:

8 - 2i + 5 = 4

2i = 9

i = 4.5%

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