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Money demand

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1[Money Demand] (a) Consider the money demand curve in Figure 1 where z=real balances (the real value of buyers’ money nment increases the nominal interest rate from i to i’, please indicate in Figure 1 the change in buyers’ surplus.

iii) Suppose the government runs the Friedman rule by setting i=0. What is the equilibrium level of real balances z? Explain why the Friedman rule is socially optimal.

Reference no: EM131094681

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