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What is the equilibrium real interest rate

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Reference no: EM131344759

Question -

Suppose the demand for Real Balances is given by the following equation:

1997_Figure.png = 1500 + 0.2Y - 10,000(r + πe).

Assume M = 4,000, P = 2, πe = .01 and Y = 5,000.

a. What is the equilibrium real interest rate? (It will be in decimal form. P and Y are given)

b. Show you results on a properly labeled Md/Ms diagram and label the equilibrium as point A.

c. Suppose Janet Yellen and Fed governors make statements and speeches to raise inflationary expectations to 4% and are successful. Solve for equilibrium real interest rate.

d. Show this equilibrium on your diagram and label as point B.

e. Why would they do this?

Reference no: EM131344759

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