Assume that the following data characterize the hypothetical economy of Trance:

Question

Assume that the following data characterize the hypothetical economy of Trance: money supply- $180 billion; quantity of money demanded for transactions = $140 billion; quantity of money demanded as an asset= $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate Instructions: Enter your answers as whole numbers. a. What is the equilibrium interest rate in Trance? b. At the equilibrium interest rate, what are the quantity of money supplied, the total quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance? Quantity of money supplied = billion Quantity of money demanded = billion Amount of money demanded for transactions billion Amount of money demanded as an asset billion

Explanation / Answer

a )

Equilibrium interest rate where demand and supply for money are equal

Money Supply = $ 180 Billion

Demand for transaction = $ 140

Quantity of money demanded for assets = 10 Billion at 12 % interest rate. 6 % fall is required for increasing demand by $ 30 Billion

Hence, Equilibrium Interest rate is 6 %.

b)

Quantity of money supplied = $ 180 billion

Quantity of money demanded = $ 180 Billion

Amount of money demanded for transaction =$ 140 Billion

Amount of money demanded as an asset= $ 40 Billion

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