Answered: Suppose that the money demand equation…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Suppose that the money demand equation is (M/P)d = 600 − 75r

where r is the real interest rate in percent. The money supply M is $900, and the price level P is fixed at 3.

a. Solve for the equilibrium real interest rate. Mark the equilibrium interest rate and the real money supply on the money market diagram.

b. Solve for the equilibrium real interest rate if M rises from $900 to $1050. Illustrate the money supply increase on the diagram in part a. Mark the new equilibrium interest rate and the new real money supply on your diagram.

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Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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