# Inflation and Real Money Equilibrium

MECO-121

Assignment # 2 (Section: 1)

Trainer: Daud Ahmed Dard

Group: 10

Group Members:

1 ) Naima Iram (16110001)

2 . Ridaah Zargham (16110100)

a few. Saeeba Ali (16110015)

5. Afrose Ceder (16110269)

five. Habib Ehtisham (16110141)

six. Rukham Khan (16110020)

Problem 11:

Assume that the demand to get real money equilibrium (M/P) is M/P = 0. 6Y – 100i, where Con is countrywide income and I is the nominal interest rate. The true interest rate 3rd there�s r is fixed at 3 percent by the investment and saving capabilities. The predicted inflation charge equals the rate of nominal money expansion. a. if Y is usually 1, 1000, M is definitely 100, plus the growth level of nominal money is definitely 1 percent, what must I and P become? b. If perhaps Y is definitely 1, 000, M is definitely 100, and the growth rate of nominal money is 2 percent, what should i and S be?

Option:

a. M/P = zero. 6Y-100i

r = 3%

Expected pumpiing = charge of nominal money development

Y = 1, 1000

M = 100

Finding the value of nominal interest rate using real interest rate and expected inflation: i= 3rd there�s r + predicted inflation

we = 3+1

i sama dengan 4

Replacing the value of " i” inside the demand for real cash balance equation: M/P sama dengan 0. 6Y-100i

100/P sama dengan 0. 6(1, 000)-100(4)

100/P = 600-400

P = 100/200

P = ½ = zero. 5

b. Y = you, 000

M = 95

Growth level of nominal money sama dengan Expected rate of pumpiing = 2% Finding the worth of nominal interest rate employing real interest and expected inflation: we = 3rd there�s r + predicted inflation

i = 3 + two

i = 5

Replacing the value of " i” inside the money require function: M/P = 0. 6Y-100i

100/P = zero. 6(1, 000)-100(5)

100/P = 600-500

S = 100/100

P sama dengan 1