The demand for money in a country is given by Md= 10,000
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The demand for money in a country is given by Md= 10,000 - 10,000r + where Md is money demand in dollars, r is the inter
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The demand for money in a country is given by Md= 10,000 - 10,000r + where Md is money demand in dollars, r is the interest rate (a 10 percent interest rate means r = 0.1), and is national income. Assume that is initially 5,000. a. Graph the amount of money demanded (on the horizontal axis) against the interest rate (on the vertical axis). b. Suppose the money supply (Ms ) is set by the central bank at $10,000. On the same graph you drew for part a., add the money supply curve. What is the equilibrium rate of interest? Explain how you arrived at your answer. c. Suppose income rises from = 5,000 to = 7,500. What happens to the money demand curve you drew in part a.? Draw the new curve if there is one. What happens to the equilibrium interest rate if the central bank does not change the supply of money? d. If the central bank wants to keep the equilibrium interest rate at the same value as it was in part b., by how much should it increase or decrease the supply of money given the new level of national income? e. Suppose the shift in part c. has occurred and the money supply remains at $10,000 but there is no observed change in the interest rate. What might have happened that could explain this?
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