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Graph the supply and demand for real money balances

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Suppose that the money demand function is (M/P)d = 1000-100r where r is the interest rate in percent. The money supply M is 1000 and the price level P is 2.

(a) Graph the supply and demand for real money balances.

(b) What is the equilibrium interest rate?

(c) Assume the price level is xed. What happens to the equilibrium interest rate if the supply of money is raised from 1000 to1200?

(d) If the Fed wishes to raise the interest rate to 7 percent, what money supply should it set?

Reference no: EM131345095

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