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Question
Suppose the money demand function is MD = P × [(0.25 × Y) − (100 × i)], where Y is expressed in billions of dollars and i is expressed in percentage points.a. Suppose that initially P = 2, Y = 5,000, and i = 5. If income rises to 6,000, what is the new equilibrium nominal interest rate?
b. Suppose that initially P = 3, Y = 4,000, and i = 7. If the price level falls to 2, what is the new equilibrium nominal interest rate?
Answer
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