The money market relation is M / P = Y L(i)

a. What is on the left-hand side of the equation?

b. What is on the right-hand side?

c. How does the function L(i) represented in that figure?

d. How does the horizontal axis have to be re-labeled? What is the variable that now shifts the money demand function? Draw a graph with the appropriate labels.

e. Show on the graph (1) as output rises, to keep the interest rate constant, the central bank must increase the real money supply; 2) as output falls, to keep the interest rate constant, the central bank must decrease the real money supply.