(Answered) Assume that the demand for real money balcnce mp is mp 06y

Management Studies

Assume that the demand for real money balcnce (M/P) is M/P =0.6Y -100i, where is national income and I i sthe nominal interest rate (in percent). The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth.

(a) If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be?

(b) Identify d(M/P)/di. What does this mean?

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