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 = $200 billion; quantity of money demanded for transactions = $170 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? _________percent.

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) In equilibrium, quantity of money demanded = Quantity of money supplied

$160 billion + $10 billion x (12 - R) = $190 billion where R: Interest rate

So, equilibrium interest rate is 8% for which mondey demand equals money supply.

(b) When interest rate is 8%,

Quantity of money demanded = Quantity of money suplied = $200 billion

Amount of money for transactions = $170 billion

Amount of money as an asset = $30 billion

Interest % Transaction demand Speculative demand Total demand Money supply ($ Billion) ($ Billion) ($ Billion) ($ Billion) (A) (B) (A) + (B) 12 170 10 180 200 10 170 20 190 200 8 170 30 200 200 6 170 40 210 200 4 170 50 220 200 2 170 60 230 200 0 170 70 240 200

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