Suppose that the money demand is given by: Md = PY(0.25-i)
Suppose that nominal income is $100 and wealth is $500 and that the money supply is set by the central bank at Ms = 20.
a. Derive the demand for bonds.
b. Draw the supply and the demand of money
c. What is the equilibrium interest rate?
d. What happens to the interest rate if the money supply increases from 20 to 30? Illustrate your answer graphically.
e. What happens to the interest rate if nominal income increases by 10%?
f. If the Federal Reserve Bank wants to increase the interest rate to 12%. At what level should it set the supply of money?