I was looking through some macroeconomic textbooks and came across a seemingly simple equation that derives the demand for real money balances, I also included the explanation for each part of the equation as per my textbook:

$\frac{M^d}{P} = L(i) \times Y$

  • $\frac{M^d}{P}$ is demand for real money
  • $L(i)$ is a decreasing function of the nomial interest rate $i$
  • $Y$ is real income

I take the point that it makes intuitive sense that at lower interest rates, the demand for for real money will increase, but I don't see how we plug in the numbers to make this equation viable at the pragmatic level. Especially $L$, how do we even know how to get data on that to plug into the the equation?


Can someone provide a short worked out example using current data?

If I'm not mistaken, as of March 2019:

  • $i$=2.5 (federal funds rate)
  • $Y$ = 2.2 (2018Q4 Real GDP)
  • $L$ = ??

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