Question

QUESTION 1

1. Money demand is M^d=P*(100+0.06*Y-100i), where Y=2000, r=4%, expected inflation rate =1%. What is the real money demand?

   		less than or equal to 200
   		greater than 200 and less than or equal to 210
   		greater than 210 and less than or equal to 220
   		greater than 220 and less than or equal to 230
   		greater than 230

0.3 points   

QUESTION 2

1. Money demand is M^d=P*(100+0.06*Y-100i), where Y=2000, r=4%, expected inflation rate =1%. If the money supply is 1075, what is the equilibrium price that clears the asset market?

   		less than or equal to 3.5
   		greater than 3.5 and less than or equal to 4.0
   		greater than 4.0 and less than or equal to 4.5
   		greater than 4.5 and less than or equal to 5.0
   		greater than 5.0

0.3 points   

QUESTION 3

1. Money demand is M^d=P*(100+0.06*Y-100i), where Y=3000, r=4%, expected inflation rate =1%. If the money supply is 1075, what is the equilibrium price that clears the asset market?

   		less than or equal to 3.5
   		greater than 3.5 and less than or equal to 4.0
   		greater than 4.0 and less than or equal to 4.5
   		greater than 4.5 and less than or equal to 5.0
   		greater than 5.0

Answer 1

Solution to Question 1 :

Money demand is the function of income and nominal interest rate, i.e. Md = f(Y,R) ; Md : Money Demand, Y : Income, R : Nominal Interest Rate

Nominal Interest Rate = Real Interest Rate + Inflation Rate

or, i = r + In

or, i = 4% + 1%

or, i = 5%

Real Money Demand = Md/P

Therefore, by solving the equation :

Md = P×(100 + 0.06×Y - 100i)

or, Md/P = (100 + 0.06 × 2000 - 100 × 5%)

or, Md/P = (100 + 120 - 5)

or, Md/P = 215

Therefore, Real Money Demand is 215

Hence, the correct option : "greater than 210 and less than or equal to 220"

NOTE : As per our guideline, in case of multiple questions, the first question is to be solved, unless specified otherwise.