Answer:
- 50,000 - 60,000( 0.25 - i)
- C. increases by $ 6,000
- A. the demand for bonds but has no effect on the demand for money
Explanation:
1. Demand for bonds is the difference between a person's wealth and their demand for money.
Demand for bonds = W - Md
= 50,000 - 60,000( 0.25 - i)
2. Assuming an interest rate of 0%.
Demand for bonds = 50,000 - 60,000( 0.25) = $35,000
Interest increases by 10%
Demand for bonds = 50,000 - 60,000( 0.25 - 0.1) = $41,000
Difference = 41,000 - 35,000 - $6,000
3. There is no provision in the money demand formula for wealth but there is in the demand for bonds formula. This means that if wealth increases, demand for bonds will increase as well but there will be no change in demand for money.
