Let's go back to the fall of 2008 when we were at the height of the financial crisis. Pretend you are steering the cruise s rates steady in the money market.
For simplicity, we hold the price level fixed at 1 and assume that inflationary expectations are fixed at 2%.
Initial Conditions before the fall of 2008
mm = money multiplier = 1.6
MB = monetary base = 2500
Money Demand
Md = P X [ a0 + .5 (Y) - 200 (i) ]
Md = 1 X [ 2000 + .5 (4800) - 200 (i) ]
Solve for the money market clearing rate of interest (show your work on your exam sheet).
Now draw a money market in the money market as point A on your exam sheet.