Question

Suppose that the money demand function is (M/P)d= 800 - 50r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is fixed at

What is the equilibrium interest rate?

Answer 1

The equilibrium interest rate can be found by setting the money demand equal to the money supply and solving for the interest rate. In this case, the money supply is $2,000 and the price level is fixed at $100. The money demand function is (M/P)d = 800 - 50r, where r is the interest rate in percent.

Step-by-step explanation:

The equilibrium interest rate can be found by setting the money demand equal to the money supply and solving for the interest rate.

In this case, the money supply is $2,000 and the price level is fixed at $100. The money demand function is (M/P)d = 800 - 50r, where r is the interest rate in percent.

Substituting the given values into the equation, we have 2,000/100 = 800 - 50r. Simplifying this equation gives us 20 = 800 - 50r.

Rearranging the equation to solve for r, we have -50r = -780, and dividing both sides by -50 gives us r = 15. Therefore, the equilibrium interest rate is 15%.