a)
To write: The algebric form of
a)
Answer to Problem 3NP
The equation for Person M’s money demand is
Explanation of Solution
Given information:
Value of bonds = $50000
2nd bond = $5000
Net wealth = Total wealth − Amount invested.
For second bond, interest rate is more compared to checking account.
So to complete the formula, subtract $50000 and the formula
So, Demand for money is,
Value of bond = $5000
Interest rate on bond = i
Interest rate on checking account = im
In percentage form, value of bond is written as
Hence the equation for Person M’s money demand is
Introduction:
Equilibrium in asset market occurs when demand of money is equal to supply of money.
b)
To write: The algebric formula of demand for bonds.
b)
Answer to Problem 3NP
Algebric formula of demand for bonds is
Explanation of Solution
Person M’s demand for bonds is simply the sum of the amount of his money that is wanted for investment in bonds,
To fund the sum of demand for money and demand for bonds, add the formulas of the demand for money from part a,
So the sum of Person M’s demand for money and bonds is
Introduction:
Equilibrium in asset market occurs when demand of money is equal to supply of money.
c)
To find: The interest rate on bonds in asset
c)
Answer to Problem 3NP
The i8nterest rate on bonds in asset market equilibrium is 6%.
Explanation of Solution
In order to find the interest rate on bonds in asset market equilibrium, either set money supply, $20000, equal to money demand from part a. or set bond supply, $80000, equal to bond demand from part b., set
Continue by dividing through by -500000
So, the interest rate on bonds in asset market equilibrium is
Introduction:
Equilibrium in asset market occurs when demand of money is equal to supply of money.
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