Why is it better to underestimate your income instead of overestimating when creating a budget?
1 answer:
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Answe and Explanation:
b) To find out the equilibrium interest we will equate the money demand function with the money supply:
1000 - 200(r) = 1200/2
r = 2%
c) If the price is fixed and if the supply of money of is increased from 1200 to 1400 then the supply of real balances will be 1400/2 = 700
The equilibrium interest would be:
1000 - 200(r) = 700
r = 1.5%
Thus, it shows that when the supply of money is increased and the price is fixed then the interest rate would fall from 2% to 1.5%
d) The supply of real balances would be 1600/2 = 800
Hence, the interest rate will be:
1000-200(r) = 800
r = 1%
As proved above, an increase in the money supply would decrease the interest rate keeping the price fixed.
e) If the Fed keeps the interest rate at 5% then,
1000 - 200(5) = Money supply/2
Money supply = 0
Reduce the money supply if the interest is increase from 2% to 5%
a) Picture is attached.
