Question

Assume that the following data characterize the hypothetical economy of Trance: money supply = $210 billion; quantity of money demanded for transactions = $150 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate.
a. What is the equilibrium interest rate in Trance?

b. At the equilibrium interest rate, what are the quantity of money supplied, the total quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance?

Answer 1

Answer:

a. What is the equilibrium interest rate in Trance?

To answer this part of the question we use the table below we use the table attached as an image.

We find the equilibrium interest rate by equating the quantity supplied with the quantity demanded, which occurs at the interest rate of 2%.

b. At the equilibrium interest rate, what are the quantity of money supplied, the total quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance?

We can easily answer this part by looking at the table, The equilibrium quantity of money supplied is $210 and the equilibrium quantity demanded is $210. The amount of money demanded for transactions is $150 and the amount of money demanded as an asset is $60.