Chapter 16 Homework Help Save&l; Submit Assume that the following data character
ID: 1110645 • Letter: C
Question
Chapter 16 Homework Help Save&l; Submit Assume that the following data characterize the hypothetical economy of Trance: money supply $180 billion; quantity of money demanded for trensactions $140 bilion; quantity of money demanded as an asset $ 10 bilion st 12 percent interest, Increasing by $10 billion for each 2-percentage-point fall in the interest rate Instructions: Enter your answers as whole numbers a. What is the equilibrium interest rate in Trance? 30 points b. At the equllibrium 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? Quantity of money suppied Quantity of imoney demanded Amount of money demended for Amount of mony demanded as an assetExplanation / Answer
An equilibrium in a money market is at a point when the money supply is equal to the money demand. In the scenario given above the money supply is $180 billion and demand for the transaction is only $140 and the demand for assets is $10 billion at the rate of 12%. Extra $30 billion is lying unused.
To reach the equilibrium the new interest rate should be 6%. At that rate, the investment in assets would be $40 billion and demand for the transaction would be $140 bringing an equilibrium in the market where demand and supply for money are equal at $180 billion.
a) Equilibrium interest rate in Trance is 6%.
b) i) Quantity of money supply will remain same at the equilibrium point because the money supply is exogenous and decided by the monetary authority. it will be $180 Billion.
ii) Quantity for money demanded will be equal to money supply at $180 billion.
iii) Quantity demand for the transaction will be $140 billion.
iv) Amount of money demand for the asset will be $40 billion.
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