Demand for Real Money Balance?

Question

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. 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?

I just need help setting up this equation. Any help is appreciated.

Answer 1

im not sure about the solution... still here is what i figured out of it:

a. i would be 4% as initailly it was 3 and then it grew by 1 making it 4%

M/P = 0.6Y - 100i

100/P = 0.6(1000) - 100(4)

100/P = 600 - 400

100/P = 200

P = 100/200

P = 1/2

if its correct then the same procedure would be followed for the part b.