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 = $190 billion; quantity of money demanded for transactions = $160 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) In equilibrium, quantity of money demanded = Quantity of money supplied

$160 billion + $10 billion x (12 - R) = $190 billion where R: Interest rate

So, equilibrium interest rate is 8% for which mondey demand equals money supply.

(b) When interest rate is 8%,

Quantity of money demanded = Quantity of money suplied = $190 billion

Amount of money for transactions = $160 billion

Amount of money as an asset = $30 billion

Interest % Transaction demand Speculative demand Total demand Money supply ($ Billion) ($ Billion) ($ Billion) ($ Billion) (A) (B) (A) + (B) 12 160 10 170 190 10 160 20 180 190 8 160 30 190 190 6 160 40 200 190 4 160 50 210 190 2 160 60 220 190 0 160 70 230 190

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