Suppose that a person’s yearly income is $60,000. Also suppose that this person’s money demand function is given by:

a. What is this person’s demand for money when the interest rate is 5%? 10%?

b. Explain how the interest rate affects money demand.

c. Suppose that the interest rate is 10%. In percentage terms, what happens to this person’s demand for money if the yearly income is reduced by 50%?

d. Suppose that the interest rate is 5%. In percentage terms, what happens to this person’s demand for money if the yearly income is reduced by 50%?

e. Summarize the effect of income on money demand. In percentage terms, how does this effect depend on the interest rate?

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