Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 7, Problem 3NP
a)
To determine
To write: The algebric form of
a)
Expert Solution
Answer to Problem 3NP
The equation for Person M’s money demand is
Explanation of Solution
Given information:
Value of bonds = $50000
2nd bond = $5000
Net wealth = Total wealth − Amount invested.
For second bond, interest rate is more compared to checking account.
So to complete the formula, subtract $50000 and the formula
So, Demand for money is,
Value of bond = $5000
Interest rate on bond = i
Interest rate on checking account = im
In percentage form, value of bond is written as
Hence the equation for Person M’s money demand is
Economics Concept Introduction
Introduction:
Equilibrium in asset market occurs when demand of money is equal to supply of money.
b)
To determine
To write: The algebric formula of demand for bonds.
b)
Expert Solution
Answer to Problem 3NP
Algebric formula of demand for bonds is
Explanation of Solution
Person M’s demand for bonds is simply the sum of the amount of his money that is wanted for investment in bonds,
To fund the sum of demand for money and demand for bonds, add the formulas of the demand for money from part a,
So the sum of Person M’s demand for money and bonds is
Economics Concept Introduction
Introduction:
Equilibrium in asset market occurs when demand of money is equal to supply of money.
c)
To determine
To find: The interest rate on bonds in asset
c)
Expert Solution
Answer to Problem 3NP
The i8nterest rate on bonds in asset market equilibrium is 6%.
Explanation of Solution
In order to find the interest rate on bonds in asset market equilibrium, either set money supply, $20000, equal to money demand from part a. or set bond supply, $80000, equal to bond demand from part b., set
Continue by dividing through by -500000
So, the interest rate on bonds in asset market equilibrium is
Economics Concept Introduction
Introduction:
Equilibrium in asset market occurs when demand of money is equal to supply of money.
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Students have asked these similar questions
Suppose that while demand for money still depends on Y as specified, it is now no longer affected by the interest rate.
Refer to the information provided in Figure 11.4 below to answer the questions that follow.
Refer to Figure 11.4. At an interest rate of 3%, there is
an excess supply of money of $400 billion.
an excess supply of money of $800 billion.
an excess demand for money of $800 billion.
an excess demand for money of $400 billion.
Interest rate, r
M'
400
800
Money, M (5 billions)
Figure 11.4
1,200
Suppose that Rina makes a new cash deposit of $85,000 at her bank.
Suppose that the bank is required only to keep new cash reserves equal to 25%. Then the maximum amount Rina's deposit will
money supply is $
increase the
decrease
Which of the following assumptions must hold to ensure that the money creation process initiated by Rina's deposit reaches its potential? Check all
that apply.
Some borrowers cash the newly acquired funds.
At least one bank in the banking system is conservative enough to keep some of its newly acquired cash deposits in its vault.
All borrowers quickly spend all of their newly acquired funds.
All banks in the banking system lend all of their excess reserves.
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