contestada

Suppose the economywide demand for money is given by: M = P(0.2Y – 25,000i). The price level P equals 3, and real output Y equals 10,000.

a. At what value should the Fed set the nominal money supply if it wants to set the nominal interest rate at 4 percent?

The nominal money supply should be set at $ .

b. At what value should the Fed set the nominal money supply if it wants to set the nominal interest rate at 6 percent?

The nominal money supply should be set at $ .

Respuesta :

Answer:

$3,000; $1,500

Explanation:

Demand for money: M = P(0.2Y – 25,000i)

Price level P = 3

Real output Y = 10,000

(i) If Fed wants to set the nominal interest rate at 4 percent, then

Nominal money supply = P(0.2Y – 25,000i)

                                       = 3 ×[0.2(10,000) - 25,000(4%)]

                                       = 3 ×[2,000 - 1,000]

                                       = $3,000

Therefore, the nominal money supply should be set at $3,000.

(ii) If Fed wants to set the nominal interest rate at 6 percent, then

Nominal money supply = P(0.2Y – 25,000i)

                                       = 3 ×[0.2(10,000) - 25,000(6%)]

                                       = 3 ×[2,000 - 1,500]

                                       = $1,500

Therefore, the nominal money supply should be set at $1,500.

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