The money demand function is given by

𝑀
𝑑
=
𝑚
0
−
𝑚
1
𝑖
,

where
𝑚
0
=
7.5
,
𝑚
1
=
32
, and
𝑖
denotes the nominal interest rate.

The money supply is
𝑀
𝑠
=
$
5.3
. Calculate the nominal interest rate the clears the market for money.

Round your answer to the nearest tenth of a percent.

Question

The money demand function is given by

𝑀
𝑑
=
𝑚
0
−
𝑚
1
𝑖
,

where 
𝑚
0
=
7.5
, 
𝑚
1
=
32
, and 
𝑖
 denotes the nominal interest rate.

The money supply is 
𝑀
𝑠
=
$
5.3
. Calculate the nominal interest rate the clears the market for money.

Round your answer to the nearest tenth of a percent.

BlackTom AI · Accepted Answer

We’re given the money demand function Md = m0 − m1 i with m0 = 7.5, m1 = 32, and i the nominal interest rate. The money supply is Ms = 5.3. The market-clearing condition is Md = Ms, so set 7.5 − 32 i = 5.3. Subtract 5.3 from 7.5 to isolate the term containing i: 7.5 − 32 i − 5.3 = 0 → 2.2 − 32 i = 0. Next, solve for i by moving the constant term to the other side and dividing: −32 i = −2.2 → i = (−2.2)/(−32) = 2.2/32. Calculator check: 2.2 ÷ 32 ≈ 0.06875.

Convert to a percentage by multiplying by 100: 0.06875 × 100 ≈ 6.875%. Rounding to the nearest tenth of a percent gives 6.9%. The steps reflect straightforward algebra from the given linear money demand function to the market-clearing condition.

FA25 ECON 302 002 Homework #9 (Monetary Policy and Phillips Curve)

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