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Homework answers / question archive / Suppose that money demand is given by MD Y(0
Suppose that money demand is given by MD Y(0.25 – i) where Y is 100. (a) If the Central Bank sets an interest rate target of 10%, what is the money supply the Central Bank must create? (b) If the Central Bank wants to decrease i from 10 to 5%, what is the new level of the money supply the Central Bank must set?
At Equilibrium Money Supply= Money demand
Answer a)
Md=Y(0.25-i)
At Y=100
i=10/100=0.1
Md=100(0.25-0.1)
Md=100(0.15)
Md=15
Central bank should set Money supply=15
Answer b)
Md=Y(0.25-i)
At Y=100
i=5/100=0.05
Md=100(0.25-0.05)
Md=100(0.2)
Md=20
Central bank should set Money supply equal to 20.
