Suppose that a person\'s yearly income is $75,000. Also, suppose that this perso

Question

Suppose that a person's yearly income is $75,000. Also, suppose that this person's money demand function is given by M^d = SY(0.45 -1). This person's demand for money when the interest rate is 10% is This person's demand for money when the interest rate is 15% is Which of the following statements correctly describes he relationship between interests rates and the demand for money? A When the interest rate increases, the demand for money decreases because interest paying bonds becomes less attractive than money balance. B When the interest rate increases, the demand for money decreases because interest paying bonds become more attractive than money balance. C When the interest rate increases, the demand for money increases because interest paying bonds become less attractive than money balance. D when the interest rate increases, the demand for money increases because stocks and bonds become more risky.

Explanation / Answer

SUBSTITUTING THE VALUE OF i AND Y IN THE EQUATION WE GET WHERE Y= 75000

i = 0.10 THEN Md = 75000(0.45 -0.10) = 75000* 0.35 = 26250

i = 0.15 THEN Md = 75000 (0.45 - 0.15) = 75000 * 0.30 = 22500.

B. WHEN THE INTEREST INCREASE THE DEMAND FOR MONEY DECREASE BECAUSE THE BONDS BECOME MORE ATTRACTIVE THAN MONEY BALANCE.

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