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 Quantity of money demanded = Amount of money demanded for billion. billion. billion transactions Amount of money demanded as an asset billion

Explanation / Answer

Firstly to answer this we can make a table ,

(a) Equilibrium interest rate in trance = 6% ( to find the equilibrium interest rate we have to equate total quantity of money demanded with total quantity of money supplied and here in this case when interest rate is 12% then, total money demanded is $150 billion and total money supplied is $180 billion . So, to make it in equilibrium Quantity of miney demanded has to increase an dit is given that to increase quantity of money demanded of an assest there will be 2% decrease in interest rate with a $ 10 billion increase in quantity money demanded . Therefore , Quantity of money demanded increase by $30 billion ,that is why interest rate decrease by 6%. So , the euilibrium interest rate is 6% [12%-6%] ).

(b) At equilibrium

Quantity of money supplied = $180 billion.

Quantity of money demanded = $180 billion.

Amount of money demanded for transactions= $140 billion.

Amount of money demanded as an assest transactions = $ 40 biilion [ i.e , $10 billion + $30 billion].

Interest rate (i) Quantity of money demanded for transactions(in $s) Quantity of money demanded as an assest (in $s) Total quantity of money demanded(in $s) Total quantity of money supplied(in $s) 12% 140 10 150 180 6%(at equilibrium) 140 40 180 180

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