John has nominal wealth of $100,000. He wants to invest his wealth in money (a chequing account) and government bonds such that he invests $50,000 in bonds and $5,000 more in bonds for every percentage point that the interest rate on bonds (i) exceeds that interest rate on his chequing account ("). 1. Derive an algebraic formula that describes John's nominal demand for bonds (Bº)? 2. Derive an algebraic formula to describe John's nominal demand for money (Mº) as a function of bonds and the interest rate on the chequing account. 3. Solve for the sum of John's nominal demand for money and nominal demand for bonds. 4. Suppose that John is a representative consumer of all individuals in the economy, that the fixed asset supplies per person are $80,000 of bonds and $20,000 of chequing accounts, and the chequing accounts do not pay interest. What is the interest rate on bonds at asset market equilibrium? a. Solve using the money market condition. b. Solve using the asset market condition. c. Will the results in a and b be the same? Why?

John has nominal wealth of $100,000. He wants to invest his wealth in money (a chequing account) and government bonds such that he invests $50,000 in bonds and $5,000 more in bonds for every percentage point that the interest rate on bonds (i) exceeds that interest rate on his chequing account ("). 1. Derive an algebraic formula that describes John's nominal demand for bonds (Bº)? 2. Derive an algebraic formula to describe John's nominal demand for money (Mº) as a function of bonds and the interest rate on the chequing account. 3. Solve for the sum of John's nominal demand for money and nominal demand for bonds. 4. Suppose that John is a representative consumer of all individuals in the economy, that the fixed asset supplies per person are $80,000 of bonds and $20,000 of chequing accounts, and the chequing accounts do not pay interest. What is the interest rate on bonds at asset market equilibrium? a. Solve using the money market condition. b. Solve using the asset market condition. c. Will the results in a and b be the same? Why?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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