CA Foundation · Business Economics · Money Market
Money demand in an economy is given by L = 500 − 20r, where r is the interest rate in percent and L is in ₹ crore. The money supply fixed by the central bank is ₹300 crore. What is the equilibrium interest rate?
The equilibrium interest rate is 10%. Setting money demand equal to money supply gives 500 − 20r = 300, so 20r = 200 and r = 10. At that rate the demand is ₹300 crore, matching the fixed supply.
- A8%
- B10%Correct
- C15%
- D25%
Explanation
At equilibrium L = M, so 500 − 20r = 300. Then 20r = 200 and r = 10%. Check: 500 − 20×10 = 300. The 25% figure would come from 500 ÷ 20, forgetting to subtract the supply.
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