Consider the model of money demand we saw in class. Let the elasticity of money demand with respect to real income be 0.8 and the elasticity of money demand with respect to the interest rate on non- monetary assets be -0.2. Imagine that real income goes up by 3%, the interest rate on non-monetary assets goes up by 1%, and the price level does not change. Then the nominal demand for money changes by percent. what aes in the blank?

Consider the model of money demand we saw in class. Let the elasticity of money demand with respect to real income be 0.8 and the elasticity of money demand with respect to the interest rate on non- monetary assets be -0.2. Imagine that real income goes up by 3%, the interest rate on non-monetary assets goes up by 1%, and the price level does not change. Then the nominal demand for money changes by percent. what aes in the blank?

Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781305971509

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 5CQQ

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Suppose that the money demand function is(M/P)d = 1,000 - 100r, where r is the interest rate in percent. Themoney supply M is 1,000 and the price level Pis 2.a. Graph the supply and demand for real moneybalances.b. What is the equilibrium interest rate?c. Assume that the price level is fixed. Whathappens to the equilibrium interest rate if thesupply of money is raised from 1,000 to 1,200?d. If the Fed wishes to raise the interest rate to7 percent, what money supply should it set?
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