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 (20% of nominal GDP = $400 billion) with the supply of money ($800 billion) plus the asset demand for money (shown in the table).

At an interest rate of 5%, the asset demand for money is $700 billion (from the table), which, when added to the supply of money, equals $1500 billion. This is less than the transactions demand for money ($400 billion), indicating excess demand for money and pressure for interest rates to decrease.

At an interest rate of 6%, the asset demand for money is $600 billion, which, when added to the supply of money, equals $1400 billion. This is still less than the transactions demand for money, indicating excess demand for money and continued pressure for interest rates to decrease.

Therefore, the equilibrium interest rate must be lower than 6% and higher than 5%. The only option in this range is B, 5%.

Refer to the Above Table