Question

For simplicity we hold the price level fixed at 1 and assume that inflationary expectations are fixed at 2%. y is also held constant in this problem. what is the equilibrium interest rate (i)?

Answer 1

Equilibrium interest rates refers to the point where the demand for particular amount of money is equal to the money's supply.
In this case, we just need to do a complete substitution and calculation

4000= 1 X[1200+0.5(6,000) - 200 (i)
]4,000=4,200- 200 (
i)I=1%