Answer to Question #48147 in Macroeconomics for sarah
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?
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%
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