The real money balance function in an economy is 0.5Y - 1000i. If the economy's real money supply is
400 and if the economy's real GDP (Y) is 1000, the equilibrium interest rate will be:

Question

Quizplus · Accepted Answer

The real money balance function is given as 0.5Y - 1000i. To find the equilibrium interest rate, set the real money balance equal to the real money supply (400). Substituting Y = 1000, we get 0.5(1000) - 1000i = 400. Solving for i gives i = 0.10.

The Real Money Balance Function in an Economy Is 0