Assume that the money demand function is (M/P)^d = 2,200

Question

Assume that the money demand function is (M/P)^d = 2,200 - 200r,where r is the interest rate in percent.The money supply M is 2,000 and the price level P is 2.If the price level is fixed and the Bank of Canada wants to fix the interest rate at 7 percent,it should set the money supply at: A) 2,000. B) 1,800. C) 1,600. D) 1,400.

Quizplus · Accepted Answer

If the Bank of Canada wants to fix the interest rate at 7%, it should adjust the money supply to equate the money demand function at 7%. 2,200 - 200r = (2,000/P)^d Setting r = 7 in the money demand function, we get: 2,200 - 200(7) = (2,000/2)^d 1,800 = ^d Therefore, the bank should set the money supply at 1,600 to equate money demand at 7% interest rate.

Assume That the Money Demand Function Is (M/P)d = 2,200