Money demand is given by M^d/P = 1000 + .2Y - 1000i.
Given that P = 200,Y = 2000,and i = .10,real money demand is equal to

Question

Money demand is given by M^d/P = 1000 + .2Y - 1000i. Given that P = 200,Y = 2000,and i = .10,real money demand is equal to

Quizplus · Accepted Answer

Real money demand is calculated by adjusting the nominal money demand formula for the price level. In this case, the formula given is for nominal money demand, and to find real money demand, we substitute the given values: P = 200, Y = 2000, and i = .10 into the formula and solve for real money demand, which is $ \frac{1000 + .2(2000) - 1000(.10)}{200} = \frac{1000 + 400 - 100}{200} = \frac{1300}{200} = 6.5 $. However, it seems there was a misunderstanding in the calculation process. The correct interpretation should involve directly calculating the nominal money demand and then adjusting for the price level if necessary. Given the formula and the values provided, the calculation should directly yield the nominal money demand without further adjustments for the price level, as the formula already incorporates P, suggesting a mistake in the explanation process. The correct approach is to plug in the values directly: $1000 + .2(2000) - 1000(.10) = 1000 + 400 - 100 = 1300$, which does not require further adjustment for P since the question asks for real money demand directly.

Money Demand Is Given by Md/P = 1000

Money Demand Is Given by M^d/P = 1000