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 = $170 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.

Instructions: Enter your answers as whole numbers.

a. What is the equilibrium interest rate in Trance?_____ percent.

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?

     Quantity of money supplied =____ $ billion.

     Quantity of money demanded =____ $ billion.

     Amount of money demanded for transactions =____ $ billion.

     Amount of money demanded as an asset =____ $ billion.

Explanation / Answer

a) the equilibrium interest rate in the economy is 8 percent.

b) At the new equlibrium the:

Quantity of money supplied =200 $ billion.

     Quantity of money demanded =200 $ billion.

     Amount of money demanded for transactions =170 $ billion.

     Amount of money demanded as an asset =30 $ billion.

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