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Calculating the equilibrium interest rate

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The demand for money in a country is given by: Md = 200,000 - 200,000r +Y
Where Md is money demand in dollars, r is the interest rate (a 10% interest rate = r = .1), and Y is national income. Assume Y is initially 1,000,000.

a. Suppose the money supply is set by the central bank at $1,198,000. What is the equilibrium interest rate?
b. Suppose income decreases from 1,000,000 to 999,000 determine the new equilibrium interest rate.
c. If the central bank wants to keep the interest rate the same as in part a, by how much should it increase or decrease the money supply?

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Solution depicts the steps to find the equilibrium interest rate in the given case.

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The demand for money in a country is given by: Md = 200,000 - 200,000r +Y
Where Md is money demand in dollars, r is the interest rate (a 10% interest rate = r = .1), and Y is national income. Assume Y is initially 1,000,000.

a. Suppose the money supply is set by the central bank at $1,198,000. What is the equilibrium ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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