of money data characterize the h 10 b and the amount of mone

of money data characterize the h $10 b and the amount of money demanded as an asset in Trance?

Solution

In this hypothetical economy of Trance the money supply is $180 billion, transaction demand for money is $140 billion, money demand as an asset is $10 billion at an interest rate of 12 percent. This demand for money as an asset will increase $10 billion per 2 percent decrease in interest rate.

Now in equilibrium money demand equal to money supply. Total money demand has to be $180 billion for equilibrium. At the 10 percent interest asset demand for money will be $20 billion. At 6 percent interest it will be $40 billion. At 6 percent interest rate total money demand will be $180 billion. So at 6 percent the money market will be in equilibrium.

So equilibrium interest rate in Trance is 6%.

b. Quantity of Money supplied: $180 billion

Quantity of total money demanded: $180 billion

Amount of money demanded for transaction: $140 billion

Amount of money demanded as an asset : $40 billion