Suppose that the money demand function is given by: Md = $Y (0.25 - i), where $Y is $100.

i. Derive the bond demand function (B d ) assuming that wealth is $50.

ii. Calculate Md and B d at interest rates of 5% and 10%. How does an increase in the interest rate affect the amount people are willing to hold, according to your calculations? How does an increase in the interest rate affect the quantity of bonds people are willing to hold?

iii. Suppose the supply of money is currently $20. Show that the equilibrium interest rate is 5%

iv. Suppose the central bank wants the equilibrium interest rate to rise to 15%, at what level should it set monetary policy? Show work. What kind of monetary policy (expansionary or contractionary) does this imply?