Question

Suppose that a​ person's wealth is ​$ and that her yearly income is ​$. Also suppose that her money demand function is given​ by: Calculate the demand function for​ bonds, . ​= nothing nothing​( nothing​) Suppose the interest rate increases by percentage points. As a​ result, the demand for bonds​ ___________. A. remains unchanged. B. decreases by ​$. C. decreases by ​%. D. increases by ​$. In view of the above demand functions for money and​ bonds, one can conclude that an increase in wealth increases​ ____________.

Answer 1

1. 50,000 - 60,000( 0.25 - i)
2. C. increases by $ 6,000
3. A. the demand for bonds but has no effect on the demand for money

Step-by-step explanation:

1. Demand for bonds is the difference between a person's wealth and their demand for money.

Demand for bonds = W - Md

= 50,000 - 60,000( 0.25 - i)

2. Assuming an interest rate of 0%.

Demand for bonds = 50,000 - 60,000( 0.25) = $35,000

Interest increases by 10%

Demand for bonds = 50,000 - 60,000( 0.25 - 0.1) = $41,000

Difference = 41,000 - 35,000 - $6,000

3. There is no provision in the money demand formula for wealth but there is in the demand for bonds formula. This means that if wealth increases, demand for bonds will increase as well but there will be no change in demand for money.