Assume that the following data characterize the hypothetical economy of Trance:

Question

Assume that the following data characterize the hypothetical economy of Trance: money supply = $200 billion; quantity of money demanded for transactions = $150 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate.

a. What is the equilibrium interest rate in Trance?  %

b. At the equilibrium interest rate, what are the quantity of money supplied, the total quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance?

Instructions: Enter only whole numbers below.

Quantity of money supplied = $

Quantity of money demanded = $

Amount of money demanded for transactions = $

Amount of money demanded as an asset = $

Explanation / Answer

a. What is the equilibrium interest rate in Trance?

Ans. 20%

Money demand = Demand for transaction + Demand as asset

=> Demand for transaction + Demand as asset = Money Supply

=> Demand for transaction = Money Supply - Demand as asset = 200 - 150 = $50 BN

At 12% demand as asset = $10 BN

At (12 - 2x)% demand as asset = $10 + 10x = $50 BN => 10x = 40 => x = 4

Hence, eql interest rate = (12 - 2x )% = 12 - 2*4 = 4%

b. Quantity of money supplied = $200 BN

Quantity of money demanded = $200 BN

Amount of money demanded for transactions = $150 BN

Amount of money demanded as an asset = $50 BN

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