If the representative consumers period t utility function is u(c t M D t /P t )
Question:
If the representative consumer’s period –t utility function is u(c t M D t /P t ) = lnc t + ln (M D t /P t ), then the (real) money-demand function in period –t is
M D t /P t = c t .((1 + i t ) /i t )
In which the left-hand side is m D t = M D t /P t (recall that uppercase M denotes nominal money whereas lowercase m denotes money in purchasing power terms).
In “conventional times,” the nominal interest rate I can never fall below zero, which, for the analysis below, is a maintained assumption.
(a) Based on the real money-demand function, compute the point elasticity of m D t (i.e., of the optimal choice m D t ) with respect to i t .
(b) Is the elasticity computed in part a strictly positive strictly negative, exactly zero, or impossible to determine?
Expert Answer:
Discrete and Combinatorial Mathematics An Applied Introduction
ISBN: 978-0201726343
5th edition
Authors: Ralph P. Grimaldi
