mm = money multiplier = .8?MB = monetary base = 3000?Money Demand: Md = P X [ a0 + .5 (Y) - 200 (i) ]?where: a0 = 1000, Y = 3600
For simplicity we hold the price level fixed at 1 and assume that inflationary expectations are fixed at 2%. Y is also held constant in this problem.
What is the equilibrium interest rate (i)?
A) 1%
B) 2%
C) 2.5%
D) 3%
E) None of the above are correct
18.
Suppose a0 falls to 800. What is the new equilibrium interest rate?
A) 1%
B) 2%
C) 2.5%
D) 3%
E) None of the above are correct
19.
Suppose that the Fed wanted to keep interest rates constant at their initial level (the value you found in #1). What would the Fed have to do in terms of open market operations to achieve this?
A) 200 in open market sales
B) 200 in open market purchases
C) 250 in open market sales
D) 250 in open market purchases
E) 2200 in open market sales
20 Given the interest rate you found in #18, what is the ex-ante real interest rate?
A) -1%
B) 0%
C) 1%
D) 2%
E) None of the above are correct