6. One of the banking innovations in the 1960s was the payment of interest on certain types of
equals (R − x), where x is the nominal return on bonds, which is exogenously determined
by market structures and the cost of servicing deposits.
(i) Use Baumol’s transactions demand model to derive the demand function for money.
(ii) Generalizing the above demand function to md(y, R, x), shows the behavior of the LM curve for shifts in x and P.
(iii) What is the effect of an increase in x on
(iv) Assuming that both R and x always increase by the expected rate of inflation, do (ii) and (iii) again.
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