The money demand curve is given by the following equation:
Md = 5,000 - 10,000r + 5Y
Md is money demand, r is the real interest rate, and Y is aggregate income.
a) Why does the equation have a negative value for the second term and a positive value for the third term?
b) Suppose that the equilibrium interest rate is 30% (r = 0.3). Calculate money demand. Suppose Y = 5,000. At the existing interest rate, there is an excess (demand/supply) of money?
c) What will be the new equilibrium interest rate?
d) How much must the money supply increase to restore the original interest rate (r=0.3)?
e) The required reserve ratio is 10%. How great an open market purchase or sale of securities should the central bank undertake to restore the original interest rate (i.e. what is the values of purchase/sale of bonds?