Question 6. Suppose that money supply and money demand determine the price level (P) in an economy. As shown in the equation below, in equilibrium, money demand equals to money supply. Equilibrium M...

Extracted text: Question 6. Suppose that money supply and money demand determine the price level (P) in an economy. As shown in the equation below, in equilibrium, money demand equals to money supply. Equilibrium M L(r +Er,Y) P The supply of real money balances Real money demand where M is the quantity of money, P is the price level, r is the real interest rate, En is the expected inflation, and Y is the national income. a. Does the real money demand positively or negatively depend on nominal interest rate, į =r+Ex? Does the real money demand positively or negatively depend on national income, Y? Why? Briefly explain your answer. b. For given values of r, Y and M, explain how nominal interest rate (i), real money demand, and price level (P) respond to an increase in Er. Briefly explain your answer.