Question

Md=100-10r+0.5Y

Md=Money demand

r= interest rate

Y= real income

a. In the money demand equation why is the sign of interest rate is negative and the sign of real income is positive, explain.

b. If real income is 800 billion TL and interest rate is %10 what is the quantity of money demand?

c. If equilibrium interest rate is %5 and real income is constant (Y=800 billion TL) what is the quantity of money supply?

d. Draw the money market equilibrium when the equilibrium interest rate is %5.

Answer 1

Md=100-10r+0.5Y

(a) In the above function, the sign of interest rate is negative because there is an inverse relationship between interest rate and money demand. Similarly, there is a direct relationship between real income and money demand. Therefore the sign of real income is positive.

(b) If Y=800 bn r= 10%

Md=100-10(0.1)+0.5(800)

Md=100-1+400

Md=499

(c) equilibrium interest rate= 5%

At equiblrium, Md=Ms

100-10(0.05)+0.5(800)=Ms

100-1/2+400=Ms

500-1/2=Ms

999/2= Ms

499.5=Ms

(d) At money market equilibrium, Md=Ms