Money Demand Worksheet Answers ECO473 – Money & Banking Dr. D. Foster – Spring 2019

Worksheet #1 Using the Cambridge model … 1. If k=10%, what is md if income is $10,000? 2. If k=10%, what is md if income is $20,000? 3. If y=$20,000 and prices rise 50%, what is md? Md? 4. If k rises to 12%, what is md if income is $15,000? 1. md = (.10) * ($10,000) = $1,000 2. md = (.10) * ($20,000) = $2,000 3. md = $2,000 (no effect); Md = $3,000 4. md = (.12) * ($15,000) = $1,800 Show graphically.

Worksheet #1

Worksheet #2 1. md = (.5)*[(50,000/4)*(.926)-2,000]+5,000 = $9,788 You are paid $50,000 per year in equal amounts every 3 months. You have $5,000 permanently saved in a checking account. You pay taxes of 7.4% on your income each pay period. You allocate $2,000 per pay period to the purchase of bonds. The remainder of your income you spend in equal increments per day over the pay period. 1. What is md? Show the graph. 2. If taxes rise to 9.5%, what is md? Show the graph. 3. If you decrease bonds to $1500, what is md? Show the graph. 1. md = (.5)*[(50,000/4)*(.926)-2,000]+5,000 = $9,788 2. md = (.5)*[(50,000/4)*(.905)-2,000]+5,000 = $9,656 3. md = (.5)*[(50,000/4)*(.926)-1,500]+5,000 = $10,038

Worksheet #2

Worksheet #2

Worksheet #2

Worksheet #3 Suppose that bonds earn 5% per year and that the fixed fee to convert bonds to money is $10 (no matter how much is converted). Assume real income is $65,000 per year. 1. What is n? What is md? 2. If income falls to $53,000, what is n & md? 3. If the fee rises to $25, what is n & md? 4. If bond interest falls to 3%, what is n & md? 5. If bond interest rises to 7%, what is n & md? Find n from: f*n = (1/2)*y*r/n … n = sqrt[(1/2)*y*r/f] 1. n = 12.75; md = (1/2)*(y/n) = $2,549 2. n = 11.51; md = $2,302 3. n = 8.06; md = $4,031 4. n = 9.87; md = $3,291 5. n = 15.08; md = $2,155

Money Demand Worksheet Answers ECO473 – Money & Banking Dr. D. Foster – Spring 2019