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

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