1.Suppose the Baumol-Tobin model of money demand is correct. Everyone is alike and earns money income of...
Question:
1.Suppose the Baumol-Tobin model of money demand is correct. Everyone is alike and earns money income of $30,000/year. Brokers charge a fee of $2 for every transaction. The money supply is $1000 per person. What is the equilibrium nominal interest rate? Suppose the Fed wants to reduce the interest rate to 2% (.02). How much of an increase in the money supply per person is necessary to do so? 2. In the Baumol-Tobin model, show that the optimal solution entails equality between the foregone interest costs and total brokerage costs. (Use the fact that in the model, n, the number of times you sell bonds per period , is equal to PY/2M, where PY is money income and M is average money demand
Macroeconomics
ISBN: 978-0321675606
6th Canadian Edition
Authors: Andrew B. Abel, Ben S. Bernanke, Dean Croushore, Ronald D. Kneebone