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Consider an economy with a constant nominal money supply, a constant level of real output Y = 100, and a constant real interest rate r = 0.

4. Consider an economy with a constant nominal money supply, a constantlevel of real output Y = 100, and a constant real interest rate r =0.10. Suppose that the income elasticity of money demand is 0.5 and theinterest elasticity of money demand is -0.1.a) By what percentage does the equilibrium price level differ from itsinitial value if output increases to Y = 106 (and r remains at 0.10)?b) By what percentage does the equilibrium price level differ from itsinitial value if the real interest increase to r = 0.11 (and Y remainsat 100).c) Suppose that the real interest rate increase to r = 0.11. What wouldreal output have to be for the equilibrium price level to remain at itsinitial value?

 

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