CA Foundation · Business Economics · Money Market
In an economy, money demand is Md = 500 − 20r, where r is the interest rate in percent, and the central bank initially fixes the money supply at ₹300 crore. If the central bank raises the money supply to ₹360 crore, by how many percentage points does the equilibrium interest rate change?
The equilibrium interest rate falls by 3 percentage points. Setting demand equal to supply gives r = 10% at ₹300 crore and r = 7% at ₹360 crore, because each extra ₹20 crore of money lowers the rate by one point.
- AIt rises by 3 points
- BIt falls by 3 pointsCorrect
- CIt falls by 2 points
- DIt falls by 10 points
Explanation
Initially 500 − 20r = 300 gives r = 10%. Now 500 − 20r = 360 gives r = 7%. The rate falls by 3 points. Option 4 is wrong because it divides the 60 crore change in money by 6 instead of the slope 20.
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