1 If there is no change in the interest rates where is the e

1. If there is no change in the interest rates, where is the equilibrium point? What is the interest rate?

2. If there is a decrease in the supply of money, where is the new equilibrium point? What is the interest rate?

3. If there is an increase in the supply of money, where is the new equilibrium point? What is the interest rate?

Interest Rate MS1 MS MS2 7 6 5 4 3 MD 7 9 1.1 1.2 1.3 Quantity of money

Solution

1. If there is no change in the interest rates, where is the equilibrium point? What is the interest rate?

B is the equilibrium point where original money supply curve i sintersecting money demand curve

It is at point B where interest rate is 5%.

2. If there is a decrease in the supply of money, where is the new equilibrium point? What is the interest rate?

New equilibrium point is A where MS1 intersects Money demand curve. Interest rate is established at 6%

3. If there is an increase in the supply of money, where is the new equilibrium point? What is the interest rate?

e interest rate?

New equilibrium point is C where MS2 intersects Money demand curve. Interest rate is established at 4%