If M^d = 2,600 - 200r,the MPC = .75,G=100,and T = 100.If the central bank wants the interest rate to be r=2,then the money supply must be

Question

Quizplus · Accepted Answer

We can use the equation for the Money Demand to find the equilibrium level of income at the interest rate r=2: MS = C + I(r) + G + NX - T M^d = 2,600 - 200(2) = 2,200 Y = (MS/P)*(1/MPC) = (2,200/1)*(1/.75) = 2,933.33 Now we can use the equation for Money Supply to find the required level of reserves: MS/P = (1/RR) * R/D Since we don't have information about the reserve requirement or the desired level of excess reserves, we can't find the exact level of required reserves. However, we do know that the Money Supply needs to increase in order to meet the increased demand for money at the lower interest rate. Therefore, the only answer choice that makes sense is D) 3,000.

If Md = 2,600 - 200r,the MPC =

If M^d = 2,600 - 200r,the MPC =