# 6) Suppose an economy is in its long-run equilibrium and the real money demand function for...

###### Question:

6) Suppose an economy is in its long-run equilibrium and the real money demand function for the economy is (M/P) d =0.2Y. Now suppose suddenly money demand becomes (M/P) d =0.4Y.

a) Draw a graph and show the initial long-run equilibrium and then show the short-run equilibrium that would results from this change in money demand [Hint: You are drawing the graph from Chapter 10 but think about how this money demand change affects velocity from Chapter 5.]

b) Assuming policymakers take no action, how would the economy transition back to the long-run equilibrium? Show this on your graph from part a).

c) Briefly explain, could monetary policy change the money supply to offset this change in money demand? If so, how would they do that?

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