Suppose that the money demand function is: (M/P)^d = 900 – 60i where r is the interest rate in percent. The money supply M is 3,000 and the price…

Suppose that the money demand function is:

(M/P)^d = 900 – 60i

where r is the interest rate in percent. The money supply M is 3,000 and the price level P is fixed at 6.

a.        Graph the supply and demand for real money balances. Make sure to label all curves and axes.

b.        What is the equilibrium interest rate? What happens to the equilibrium interest rate if the supply of money is reduced from 3,000 to 2,400? Show your work.

a.        If the central bank wants the interest rate to be 3 percent, what money supply should it set? Show your work.

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