Answer Happy

M The money market relation (equation 5.3) is P = Y L(i) a. What is on the left-hand side of equation (5.3)? b. What is on the right-hand side of equation (5.3)? c. Go back to Figure 4-3 in the previous chapter. How is the function L(i) represented in that figure? d. You need to modify Figure 4-3 to represent equation (5.3) in two ways. How does the horizontal axis have to be re- labeled? What is the variable that now shifts the money demand function? Draw a modified Figure 4-3 with the appropriate labels. e. Use your modified Figure 4-3 to show that (1) as output rises, to keep the interest rate constant, the central bank must increase the real money supply; (2) as output falls, to keep the interest rate constant, the central bank must decrease the real money supply.