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Assume that the money demand function is (M/P)d = 2,200 – 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

Respuesta :

Answer: The nominal money supply should set at 1,600.

Explanation:

Given that,

Money demand function: (M/P)d = 2,200 – 200r

r - Interest rate

Money supply (M) = 2,000

Price level (P) = 2

If the fed wants to set the interest rate at 7% then,

Money supply = money demand

[tex](\frac{M}{P})^{s}[/tex] = [tex](\frac{M}{P})^{d}[/tex]

[tex]\frac{M}{P}[/tex] = 2,200 – 200r

P = 2 and r = 7%

[tex]\frac{M}{2}[/tex] = 2,200 – 200 × 7

                            M = 800 × 2

                            M = 1,600

The nominal money supply should set at 1,600.

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