The real interest rate r is given by r = i - m where i nominal interest rate and r the rate of inflation.
Suppose the economy-wide demand for money is given by My = P(0.6Y - 40000i) where P is the
price level, Y is real GDP and i nominal interest rate.
If inflation is r = 6% = 0.06 and what level does the nominal interest rate need to be in
order for the real interest rate to be r = 1.25% = 0.0125?
What value should the Reserve Bank set the nominal money supply Ms if the price level is P =
5, real GDP is Y = 60,000 and it wants the real interest rate to be be r = 1.25% = 0.0125?