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March 26, 2017

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Consider an economy with a constant nominal money supply, a constant level of real output Y = 100, and a constant real interest rate, r = 0.10. Suppose that the income elasticity of demand is 0.5 and the interest elasticity of money demand is –0.1.
By what percentage does the equilibrium price level differ from its initial value if output increases to Y = 106 (and r remains at 0.10).

I don't know where to start.

  • Economics - ,

    Interest rate increase

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