Suppose the economywide demand for money is given by: m = p(0.2y – 25,000i). the price level p equals 3, and real output y equals 10,000.

a. at what value should the fed set the nominal money supply if it wants to set the nominal interest rate at 4 percent?

the nominal money supply should be set at $ .

b. at what value should the fed set the nominal money supply if it wants to set the nominal interest rate at 6 percent?

the nominal money supply should be set at $ .

$3,000; $1,500

Explanation:

Demand for money: M = P(0.2Y – 25,000i)

Price level P = 3

Real output Y = 10,000

(i) If Fed wants to set the nominal interest rate at 4 percent, then

Nominal money supply = P(0.2Y – 25,000i)

                                       = 3 ×[0.2(10,000) - 25,000(4%)]

                                       = 3 ×[2,000 - 1,000]

                                       = $3,000

Therefore, the nominal money supply should be set at $3,000.

(ii) If Fed wants to set the nominal interest rate at 6 percent, then

Nominal money supply = P(0.2Y – 25,000i)

                                       = 3 ×[0.2(10,000) - 25,000(6%)]

                                       = 3 ×[2,000 - 1,500]

                                       = $1,500

Therefore, the nominal money supply should be set at $1,500.

answer; /// that is so (false);

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