Refer to the above table.Suppose the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table.If the nominal GDP is $2000 billion, the equilibrium interest rate is:
A)4 percent.
B)5 percent.
C)6 percent.
D)7 percent. Refer to the above table.Suppose the transa.

Question

Refer to the above table.Suppose the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table.If the nominal GDP is $2000 billion, the equilibrium interest rate is:
A)4 percent. 
B)5 percent. 
C)6 percent. 
D)7 percent. Refer to the above table.Suppose the transa.

Quizplus · Accepted Answer

To find the equilibrium interest rate, we need to equate the transactions demand for money with the supply of money added with the asset demand for money at that interest rate.

Transactions demand for money = 0.20 * Nominal GDP = 0.20 * $2000 billion = $400 billion

Asset demand for money at 5% interest rate = $200 billion

Total demand for money at 5% interest rate = $800 billion + $200 billion = $1000 billion

Since the transactions demand for money is given, we need to find the interest rate at which the total demand for money is equal to $400 billion.

From the table, we can see that at an interest rate of 5%, the total demand for money is $1000 billion, which is higher than the transactions demand for money of $400 billion. At an interest rate of 6%, the total demand for money is $960 billion, which is lower than the transactions demand for money.

Therefore, the equilibrium interest rate is 5%.

Refer to the Above Table