Answer: 17.5%
Explanation:
The equilibrium will occur where the money demanded equals to the money supplied i.e Ms = Md
From the question, the supply of currency by the Central Bank = 40
Money Supply (Ms) = m × B
where m = Money multiplier = 2.5
Note that the money multiplier can also be equal to 1/rr in situations wherebt the consumers do not hold any currency.
rr = reserve ratio, = 0.4
B = monetary base = 40
Note that the monetary base here is 40.
Since reserve ratio = 0.4, therefore
m = 1/0.4 = 2.5
Therefore, Ms = m × B
= 2.5 × 40
= 100
Thus Money supply Ms = 100.
Money demand(Md) = Y(0.3 - i),
Y = income = 800
i = interest rate
Since (Md) = Y(0.3 - i),
Md = 800(0.3 - i)
Equate the equation for the money demand and money supply together.
Ms = Md
100 = 800(0.3 - i)
100 = 240 - 800i
800i = 240 - 100
800i = 140
i = 140/800
i= 0.175
= 17.5%
Therefore, the interest rate is 17.5%
