Question

Suppose that a person's wealth is $50,000 and that her yearly income is $60,000. Also suppose that her money demand function is given by md = $y10.35 - i2

a. Derive the demand for bonds. Suppose the interest rate increases by 10 percentage points. What is the effect on her demand for bonds?

Answer 1

Thank you for asking this question. Here is your answer:

Bd = 50000 - 60000(0.35 - i)

If the interest rate increases by 1 percentage points the bond demand increases by $6000.

So the final answer for this question is $6000.

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