Question

Suppose that a person’s yearly income is $50,000, and that the person’s money demand function is...

Suppose that a person’s yearly income is $50,000, and that the person’s money demand function is given by: M^d = $Y(0.35-i).

a.       What is this person’s demand for money when the interest rate is 5%? 10%?

b.       Explain how the interest rate affects money demand.

c.       Suppose the interest rate is 10%. In percentage terms, what happens to this person’s demand for money if the yearly income is reduced by 50%?

d.       Suppose the interest rate is 5%. In percentage terms, what happens to this person’s demand for money if the yearly income is reduced by 50%?

e.       Summarize the effect of income on money demand. In percentage terms, how does this effect depend on the interest rate?

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