Money demand. Suppose that a person’s wealth is $50,000 and that her yearly income is $60,000....

Money demand. Suppose that a person’s wealth is $50,000 and that her yearly income is $60,000. Also, suppose that her money demand function is given by:Md = $Y(0.35 − i)

(a) What is her demand for money and her demand for bonds when the interest rate is 5%? 10%? Remember that the sum of money and bonds demanded is total wealth.
(b) Describe the effect of the interest rate on money demand and bond demand.
(c) Suppose that the interest rate is 10%. In percentage terms, what happens to her demand for money if her yearly income is reduced by 50%?
(d) Suppose that the interest rate is 5%. In percentage terms, what happens to her demand for money if her yearly income is reduced by 50%?
(e) Summarize the effect of income on money demand. How does it depend on the interest rate?

Expert Solution

Rahul Sunny answered 2 years ago

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