The total demand for money is equal to the transactions demand plus the asset demand for money. 1. Assume that each dollar held for transactions purposes is spent on the average 2 times per year to buy final goods and services. If nominal GDP is 800 billion dollars, what is the transaction's demand for money? Number 2. The table below shows the asset demand at certain rates of interest. Using your answer to part 1, complete the table to show the total demand for money at various rates of interest. Interest rate (in %) 9 7 5 3 Asset demand (billions) 60 100 140 180 Total demand (billions) Number Number Number Number 3. If the money supply is 480 billion, what will be the equilibrium rate of interest? Number 4. If the money supply rises to 560, will be the new equilibrium rate of interest? Number 5. If GDP rises, what will be the effect on the rate of interest? Click for List
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The transaction demand for money is equal to the average amount spent per year on final goods and services, or 2x. Show more…
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The spreadsheet provides data about the demand for money in Minland. Columns A and B show the demand for money schedule when real GDP $\left(Y_{0}\right)$ is $\$ 10$ billion and Columns A and C show the demand for money schedule when real GDP $\left(Y_{1}\right)$ is $\$ 20$ billion. The quantity of money is $\$ 3$ billion. $$\begin{array}{|c|c|c|c|} \hline & \mathbf{A} & \mathbf{B} & \mathbf{C} \\ \hline \mathbf{1} & r & Y_{0} & Y_{1} \\ \hline 2 & 7 & 1.0 & 1.5 \\ \hline 3 & 6 & 1.5 & 2.0 \\ \hline 4 & 5 & 2.0 & 2.5 \\ \hline 5 & 4 & 2.5 & 3.0 \\ \hline 6 & 3 & 3.0 & 3.5 \\ \hline 7 & 2 & 3.5 & 4.0 \\ \hline \mathbf{8} & 1 & 4.0 & 4.5 \\ \hline \end{array}$$ What is the interest rate when real GDP is $\$ 10$ billion? Explain what happens in the money market in the short run if real GDP increases to $\$ 20$ billion.
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