Suppose that a person's wealth is ($ 50,000) and that her yearly income is ($ 60,000). Also
Question:
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
\[
M^{d}=\$ Y(0.35-i)
\]
a. Derive the demand for bonds. Suppose the interest rate increases by 10 percentage points. What is the effect on her demand for bonds?
b. What are the effects of an increase in wealth on her demand for money and her demand for bonds? Explain in words.
c. What are the effects of an increase in income on her demand for money and her demand for bonds? Explain in words.
d. Consider the statement "When people earn more money, they obviously will hold more bonds." What is wrong with this statement?
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Step by Step Answer:
a To derive the demand for bonds we need to first find the demand for money at the initial interest rate i and then derive the demand for bonds by sub...View the full answer
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Jonas Araujo
I have recently received the degree of PhD. In Physics by the Universidade Federal do Maranhão after spending a term in Durham University, as I have been awarded a scholarship from a Brazilian mobility program. During my PhD. I have performed research mainly in Theoretical Physics and published works in distinguished Journals (check my ORCID: https://orcid.org/0000-0002-4324-1184).
During my BSc. I have been awarded a scholarship to study for a year in the University of Evansville, where I have worked in detection-analysis of photon correlations in the the Photonics Laboratory. There I was a tutor in Electromagnetism, Classical Mechanics and Calculus for most of that year (2012).
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