3. Suppose the money demand function is: Md/P= 1,000 - 100r where r is real interest rate in percent. Money supply is 1,000 and the price level (P) is 2 What is the equilibrium interest rate? A. B. Draw a graph to show Md and Ms, indicate the equilibrium interest rate and real money balance. c. Assumed the price level is fixed. If the Fed wishes to raise the interest rate to 7%, what money supply should it set? Show your answers in the same graph of B). D. Base on the new Ms in C), government would like to restore the interest rate back to the original equilibrium level by changing Md, what should be the new price level? Show your answers in the same graph of B).

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