In a third world country, the central bank wants to reduce the inflation rate by 5%. The current money supply is $2.0 trillion and the goal is to have equilibrium in the money market (Ms=Md). What should be the new target interest rate to reduce the inflation rate by 5% and to keep the money market in equilibrium? Use the quantity theory of money model (M*V=P*Y, or M*V=P*Q) and assume that V and Y (or Q) are constant. The estimated money demand function is given as: Md = 10-0.7i
Please show work and explain.