Suppose that a person\'s yearly income is $80,000. Also, suppose that this perso

Question

Suppose that a person's yearly income is $80,000. Also, suppose that this person's money demand function is given by -sY035- Suppose that the interest rate is 10% The percentage change in this person's demand for money if her yearly income falls by 50% is 50 %. Suppose that the interest rate is 5%. The percentage change in this person's demand for money if her yearly income falls by 50% is 50% Which of the following statements best describes the effect of income on the demand for money? OA Changes in income do not impact demand for money OB. Any decrease (or increase) in income leads to a less than proportional increase in the demand for money is high. OC. Any decrease (or increase) in income leads to a more than proportional increase in the demand for money is low OD. Any decrease (or increase) in income leads to a proportional increase in the demand for money regardless of the interest rate. Previous Question Next Question Submit Test that her money demand funciton is given by Md Y(0.35-i)

Explanation / Answer

Q3. The derived IS relation is correct.

Derivation of LM relation -

(M/P)d = (M/P)

2.5Y - 8,617i = 1,505

-8,617i = 1,505 - 2.5Y

8,617i = -1,505 + 2.5Y

i = (-1,505/8,617) + (2.5/8,617)Y

i = -0.17465 + 0.00029Y

The LM relation is as follows -

i = -0.17465 + 0.00029Y

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