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. If the price level is fixed and the Fed 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.

Quizplus · Accepted Answer

To fix the interest rate at 7%, set (M/P)d = 2,200 - 200(7) = 800. With P = 2, M = 800 * 2 = 1,600.