Assume that money demand is given by the following equation: M-PY/300i Where the

Question

Assume that money demand is given by the following equation: M-PY/300i Where the price level P - 2 wealth w = 25,000 Income Y = 60,000 and i is the interest rate The bonds supply Bs-15,000 1. Calculate the money supply? Ms- 2. Calculate the interest rate that will result in equilibrium in the money market What is he equation for the bond demand B (Getters and coeficents) Bd = 4. Use the interest rate calculated in 2. to calculate the value of the bonds demand (show your calculation) Bd = 5. Is the bonds market in equilibrium? yes or no ? why

Explanation / Answer

According to Keynes, total wealth in the economy is equal to total supply of bonds plus total supply of money which implies Wealth = money supply + bond supply. Also at the equilibrium we must have

Quantity demand of bonds and money = quantity supplied of bonds and money

Bd + Md = Bs + Ms

a) Wealth is $25000 and bond supply is $15000. Hence money supply is $25000 - $15000 = $10,000.

b) Money market equilibrium has Md = Ms

PY/300i = 10000

2*60,000/300i = 10000

i* = 4%

c) Bond demand can be found as

Bd + Md = Bs + Ms

Bd = Bs + Ms – Md

Bd = Bs + Ms - PY/300i

d) Bond demand is computed at:

Bd = 15000 + 10000 – 10000 = 15000

e) Yes because the quantity demanded of bonds is equal to the quantity supplied of bonds.

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