Question

Money Demand in the Republic of Wakanda is given by: MD = PY (0.25 – i)...

Money Demand in the Republic of Wakanda is given by:

MD = PY (0.25 – i)

a) Assume that nominal income is $100 billion. What is the demand for money when the interest rate is 3% and 6%?

b) How does the interest rate affect the demand for money in Wakanda?

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Homework Answers

Answer #1

Answer : MD = PY(0.25-i)

a) Nominal Income = $100 billion

When i=3%

Demand for money = $100(0.25- i)

Demand for money = $100(0.25- 0.03)

Demand for money = $100billion(0.22)

Demand for money = $22billion

When i=6%

Demand for money = $100 billion (0.25-0.06)

Demand for money = $19billion

Answer b : This means that demand for money goes down when interest rate rises demand for money is less attractive because as the interest rate is the oppournity cost of holding or demanding money. As increase in interest rate lead to decrease in the demand of money.Wakanda firms and household thinks that as interest rate increases so there is no motivate of holding the money into an account. There is no inverse relationship between demand for money and interest rate.

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