Answers
a)
Given Md=Y*(0.24-i)
Put Y=300
Md=300*(0.24-i)=72-300i
Let us calculate Md for i=4%. Set i=0.04
Md=72-300i=72-300*0.04=$60
Let us calculate Md for i=9%. Set i=0.09
Md=72-300i=72-300*0.09=$45
b)
| i | Md=72-300*i | Ms |
| 0% | 72 | 60 |
| 4% | 60 | 60 |
| 10% | 42 | 60 |
| 17% | 21 | 60 |
| 24% | 0 | 60 |
For equilibrium Md=Ms
72-300i=60
i=4% (Equilibrium interest rate)
c)
If interest rate is to hiked to by 10% i.e. 4% to 10%
Md=72-300i=72-300*0.14=$30
In equilibrium Md=Ms, So,
Money supply should be set at $30
4%, 60 Md Ms 0% 4% 8% 20% 24% 12% 16% Interest rate, i
.
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