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# 3. Consider a bond that promises to pay $100 in one year. a. What is the interest rate on the bond if its price today is $75? $85? $95? b. What is the relation between the price of the bond and the interest rate? c. If the interest rate is 8%, what is the price of the bond today?

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## 3. Consider a bond that promises to pay $100 in one year. a. What is the interest rate on the bond if its price today is $75? $85? $95? b. What is the relation between the price of the bond and the interest rate? c. If the interest rate is 8%, what is the price of the bond today? 4. The following are the money demand and money supply functions in an economу. M €8,000 Md = €40,000 (0.25 – i) a. Calculate the equilibrium interest rate. b. Suppose the central bank raises the equilibrium interest rate to 10%, will there be excess money supply or money demand? What monetary policy should be followed to reach the new equilibrium interest rate? DIG DEEPER MyEconLab Visit www.myeconlab.com to complete all Dig Deeper problems and get instant feedback. 5. 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 SY(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. 3. Consider a bond that promises to pay $100 in one year. a. What is the interest rate on the bond if its price today is $75? $85? $95? b. What is the relation between the price of the bond and the interest rate? c. If the interest rate is 8%, what is the price of the bond today? 4. The following are the money demand and money supply functions in an economу. M €8,000 Md = €40,000 (0.25 – i) a. Calculate the equilibrium interest rate. b. Suppose the central bank raises the equilibrium interest rate to 10%, will there be excess money supply or money demand? What monetary policy should be followed to reach the new equilibrium interest rate? DIG DEEPER MyEconLab Visit www.myeconlab.com to complete all Dig Deeper problems and get instant feedback. 5. 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 SY(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. 3. Consider a bond that promises to pay $100 in one year. a. What is the interest rate on the bond if its price today is $75? $85? $95? b. What is the relation between the price of the bond and the interest rate? c. If the interest rate is 8%, what is the price of the bond today? 4. The following are the money demand and money supply functions in an economу. M €8,000 Md = €40,000 (0.25 – i) a. Calculate the equilibrium interest rate. b. Suppose the central bank raises the equilibrium interest rate to 10%, will there be excess money supply or money demand? What monetary policy should be followed to reach the new equilibrium interest rate? DIG DEEPER MyEconLab Visit www.myeconlab.com to complete all Dig Deeper problems and get instant feedback. 5. 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 SY(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. 2. Suppose that the household nominal income for an economy is £50,000 billion and the demand for money in this economy is given by Md = £Y(0.2 – 0.8i) a. What is the demand for money when the interest rate is 1% and 5%? b. What will be the impact on the demand for money if the nominal income declines by 20%? c. What is the relationship between the demand for money and income? Money demand and the interest rate? d. Explain what the central bank should do to interest rates if it needs to increase the demand for money. 2. Suppose that the household nominal income for an economy is £50,000 billion and the demand for money in this economy is given by Md = £Y(0.2 – 0.8i) a. What is the demand for money when the interest rate is 1% and 5%? b. What will be the impact on the demand for money if the nominal income declines by 20%? c. What is the relationship between the demand for money and income? Money demand and the interest rate? d. Explain what the central bank should do to interest rates if it needs to increase the demand for money. 2. Suppose that the household nominal income for an economy is £50,000 billion and the demand for money in this economy is given by Md = £Y(0.2 – 0.8i) a. What is the demand for money when the interest rate is 1% and 5%? b. What will be the impact on the demand for money if the nominal income declines by 20%? c. What is the relationship between the demand for money and income? Money demand and the interest rate? d. Explain what the central bank should do to interest rates if it needs to increase the demand for money.

## Expert Answer

Answer :- (3) 1. a. 33.33%,17.647% and 5.263% b. negative relationship. If price of bond increase
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