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Suppose the public only hold currency (i.e. there are no banks). The demand for money is given by Money demand = $Y(0.4 - i)The nominal income is $100 and interest rate is held fixed by the central bank at 10% (or 0.1). Starting from the initial equilibrium suppose nominal income increases to $125. The increase in income will require the central bank to increase the supply of money from ________ to ________ .Group of answer choices100; 125300; 37530; 37.540; 50

Question

Suppose the public only hold currency (i.e. there are no banks). The demand for money is given by Money demand = Y(0.4i)ThenominalincomeisY(0.4 - i)The nominal income is 100 and interest rate is held fixed by the central bank at 10% (or 0.1). Starting from the initial equilibrium suppose nominal income increases to $125. The increase in income will require the central bank to increase the supply of money from ________ to ________ .Group of answer choices100; 125300; 37530; 37.540; 50

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Solution

The demand for money is given by the equation Money demand = $Y(0.4 - i).

In the initial equilibrium, the nominal income is $100 and the interest rate is 0.1. Substituting these values into the equation gives:

Money demand = 100(0.40.1)=100(0.4 - 0.1) = 30

Now, suppose the nominal income increases to $125. Substituting this new value into the equation gives:

Money demand = 125(0.40.1)=125(0.4 - 0.1) = 37.5

Therefore, the increase in income will require the central bank to increase the supply of money from 30to30 to 37.5.

This problem has been solved

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