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Equation For Monetary Equilibrium Sample Assignment

Assume that the supply of money is Rs. 100 crores and M^D_T = 0.10Y and M^Da = 40-500i, where i is the rate of interest. Determine the equilibrium level of income corresponding to the rate of interest 10 % and 4%

Solution

An equation for monetary equilibrium is derived by equating the supply of money and demand for money  (i.e., M_s = M^D _T+M^D_a
i.e.,                         100= 0.10Y +40-500 i
Or                  60 + 500 I = 0.10 Y
Or                600 + 5000 I = Y
Giving the different  values to i . i.e., I = 1% and i= 4% , we can obtain corresponding values of Y

Solution I:

When                      i= 1%
                            Y = 600 + 5000 (.01)
                               = 650

Solution II:

When                      i= 4%
                            Y = 600+5000 (.04)
                               = 800
Thus , it follows that equation (1) is simply an expression of the functional relationship between the equilibrium level of income and the rare of interest.

Assume that the supply of money is Rs. 100 crores and the M = 0.05Y and M = 40-500i, Determine the equilibrium level of income corresponding to the rate of interest 10% and 15%

An equation for monetary equilibrium is derived by equating the supply of demand for money, i.e.,
                                                M_s = M^D_T + M^D_a
 i.e.,                                         100 = 0.05 Y + 40-500i
Or                                   60 + 500 I = .05Y
Or                            .200 + 10,000 I = Y
Given the different values to i,  i.e., i= 10% and  i= 15% we can obtain corresponding values of Y.

Situation I

i= 10%                     Y = 1,200 +1,000 = 2,200.

Sotuation II

i= 15%                     Y = 1,200 + 1,500 = 2, 700.

                         

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Equilibrium Level Of Inceome	Equation For Monetary Equilibrium
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Regardless Of The Level Of Income

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