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What is the equilibrium interest rate

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Use the following information to answer the next four questions. Each multiple choice question is worth 3 points. 

mm = money multiplier = .8

MB = monetary base = 2500

Money Demand: Md = P X [ a0 + .5 (Y) - 200 (i) ]

where: a0 = 800, Y = 4000

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.

A) What is the equilibrium interest rate (i)?

B) Suppose a0 falls to 600. What is the new equilibrium interest rate?

C) Suppose that the Fed wanted to keep interest rates constant at their initial level (the value you found in A). What would the Fed have to do in terms of open market operations to achieve this?

D) Given the interest rate you found in B, what is the ex-ante real interest rate?

Reference no: EM132606727

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