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What happens to the real money balance

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Reference no: EM132472941

Suppose you are given the following information:

Real money demand function: L(i, Y) = 0.25Y - 200i

Output: Y = 8000

Money supply: MS = 3200

a) If the equilibrium real interest rate (r) is fixed at 4% and expected inflation is 2%, then the real money balance is 800." True/False/Uncertain, explain.

b) Find the level of (nominal) money supply if the central bank wants to keep the price level to 5. What happens to the real money balance? Explain.

Reference no: EM132472941

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