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. The equilibrium interest rate is
Percent.
A)2
B)4
C)6
D)8

Quizplus · Accepted Answer

To find the equilibrium interest rate, we need to set the money demand equal to the money supply:

(M/P)d = M

Substitute the given values and solve for r:

(2,200 - 200r)/2 = 2,000 
2,200 - 200r = 4,000 
200r = 1,800 
r = 9

However, we need to convert the interest rate from decimal form to percentage form, so the equilibrium interest rate is 9%.

Out of the answer choices given, the closest value to 9% is C)6.