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 = $160 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.

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?

Instructions: Enter only whole numbers for your answers below.

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.   What is the equilibrium interest rate? Explain.

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?

(a) The equilibrium interest rate is 4% where the quantity of money supplied is equal to the total quantity demanded.

(b) At the equilibrium interest rate the quantity of money supplied is180 and the asset demand for money is 20, the transactions demand for money is 160 and the total quantity of money demanded is 180

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