Question

If transactional money demand is mt= 0.4Y and speculative demand mz= 125 - 200r. What is the total money or how do you use these to calculate the LM equation?

Answer 1

Solution

M_d= 0.4Y

M_s= 125-200r

let money supply M=200

At equilibrium

Money supply= money demand

$200= 0.4Y+125-200r$

$0.4Y=200-125-200r$

The LM equation is:

$Y=187.5+500r$