Suppose that money demand is given by M d=$Y(.25-i), where $Y=100.also,suppose that the supply of moneyMs $20

Question

Pleaase i need this asap by today noon. this is an macroeconomics question? Now what is the interest rate? The question is written in nominal i.e. dollar) values. answer must be in nominal interest rate, i. plus if the Federal Reserve Bank want to increase i by 10%( from 2% to 12%) at what level should the Fed. set the supply of money, M s??

Answer 1

1) Yes, it really is macroeconomic question.

2) Interest rate:

Equilibrium Ms=Md

Y=100

Md=Y(025-i) = 100*(0.25-i)=25-100i

Ms=20

Md=Ms

25-100i=20

25-20=100i

5=100i

i=5/100=0.05 = 5%

3) If fed wants to increase i by 10 percentage points:

i=5+10=15% = 0.15

Ms=100*(0.25 -0.15) = 100*0.1=10

Current Ms=20

Change should be ΔMs=10 - 20 = $-10

For "i" change from 2% to 12% Ms should change:

Ms(2%)=(0.25-0.02)*100=0.23*100=23

Ms(12%)=(0.25-0.12)*100=0.13*100=13

So Ms should change from $23 to $13 or by ΔMs=13-23= $-10