Question

Money demand in an economy in which no interest is paid on money​ is:

Mᵈ/ᵖ = 500 + .2Y - 1000i

where Y is real income and i is the nominal interest rate.
Suppose that P​ = 150​, Y​ =500 ​, and i​ = 0.08. Calculate the following​:

Real money​ demand: __

Answer 1

The real money demand in the given economy, calculated using the given formula Md/P = 500 + .2Y - 1000i and substituting P = 150, Y = 500, and i = 0.08, is 520 units of currency.

Step-by-step explanation:

To calculate the real money demand (Md/P), we use the provided money demand function Md/P = 500 + .2Y - 1000i, where P is the price level, Y is real income, and i is the nominal interest rate. Given that P = 150, Y = 500, and i = 0.08, we can plug these values into the function:

Real money demand = 500 + .2(500) - 1000(0.08) = 500 + 100 - 80 = 520.

Therefore, the real money demand in this economy is 520 units of currency.