Assume That the Money Demand Function Is (M/P)^d = 2,200

Multiple Choice

Assume that the money demand function is (M/P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

A) drop by 4 percent.
B) drop by 2 percent.
C) drop by 1 percent.
D) remain unchanged.