Suppose real money demand is L = 0.8 Y - 100,000 (r + π^e) .
If the nominal money supply is 12,000,real output is 15,000,the real interest rate is .02,and the expected inflation rate is .01,then the price level is

Question

Quizplus · Accepted Answer

First, we need to rearrange the real money demand function to solve for the price level:

L = M/P = 0.8 Y - 100,000 (r + πSeUePe/P)

where M is the nominal money supply, P is the price level, and πSe is the expected inflation rate.

Substituting in the given values, we get:

12,000/P = 0.8(15,000) - 100,000(0.02 + 0.01)

12,000/P = 12,000

Solving for P, we get:

P = 4/3

Therefore, the answer is C) 4/3. This means that the price level has increased by 33.33% due to the expected inflation rate of 1%.

Suppose Real Money Demand Is L = 0