Suppose the real money demand function is M^d/P = 2400 + 0.2Y - 10,000 (r + π^e) .
Assume M = 5000,π^e = .03,and Y = 5000.If the price level were to decrease from 2.5 to 2.0,then the real interest rate would decrease by how many percentage points (assuming M^d,π^e,and Y are unchanged) ?

Question

Quizplus · Accepted Answer

When the price level decreases, the real money supply (M/P) increases. The increase in real money supply leads to a decrease in the real interest rate to maintain equilibrium in the money market. Calculating the change in real interest rate using the given function shows a decrease of 5 percentage points.

Suppose the Real Money Demand Function Is Md/P = 2400

Suppose the Real Money Demand Function Is M^d/P = 2400