Q. Show the advantage and disadvantage of money?
Money has one significant advantage and one disadvantage compared to bonds:
· Advantage: Money is more liquid than bonds. If most of your wealth is invested in bonds, firstyou should sell some of the bonds when you want to make a payment.
· Disadvantage: You receive interest payments on bonds though not on money.
At 0% interest, there will be no reason to hold bonds and demand for money would be maximized. The higher the interest rate, the more you lose by holding money in place of bonds. So we would expect the demand for money to fall when R increases and this is the assumption in IS -LM model.