Assignment:
Question 1. Suppose that a person's wealth is $50,000 and that her yearly income is $60,000. Also suppose that her money demand func- tion is given by
Md = $Y (.35 - i )
a. Derive the demand for bonds. Suppose the interest rate increases by 10 percentage points. What is the effect on the demand for bonds?
b. What are the effects of an increase in wealth on the demand for money and the demand for bonds? Explain in words.
c. What are the effects of an increase in income on the demand and the demand for bonds? Explain in words.
d. Consider the statement "When people earn more money, they obviously will hold more bonds." What is wrong with this statement?