Suppose that the money demand function is
(M/P)d=100-10r
where r is the interest rate in percent. The money supply M is 100 and the price level P is 2.
a. Graph the supply and demand for real money balances.
b. What is the equilibrium interest rate?
c. Assume the price level is fixed. What happens to the equilibrium interest rate if the supply of money is raised from 100 to 120?
d. If the Fed wishes to raise the interest rate to 8 percent, what money supply should it set?