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 = $210 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 for your answers below.

Quantity of money supplied = $ _______

Quantity of money demanded = $ _______

Amount of money demanded for transactions = $ ________

Explanation / Answer

a) As we know, money supply = money demanded
Money Supply = 210 billion $

Money demand = 160 at 12 percent , 170 at 10 percent , 180 at 8 percent , 190 at 6 percent ,200 at 4 percent and 210 at 2 percent.
So, equilibrium interest rate at Trance is 2 percent.
b) Quantity of money supplied = $ 210 billion
Quantity of money demanded = $210 billion- $ 150 billion = $ 60 billion
Amount of money demanded for transactions = $150 billion

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