Assume that the money demand function is (M / P)^d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P = 2, 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.

Question

Quizplus · Accepted Answer

To find the money supply, substitute r = 7 into the money demand function: (M / P)^d = 2,200 - 200(7) = 800. Since P = 2, M = 800 * 2 = 1,600.

Assume That the Money Demand Function Is (M / P)d

Assume That the Money Demand Function Is (M / P)^d