asset, money, prices (1 Viewer)

[mouse]

help:

Mr. Midas has a wealth of $100,000 that he invests entirely in money ( a checking account) and government bonds. Mr. Midas intructs his broker to invest $ 50,000 in bonds, plus $5,000 more in bonds for every percentage point that the interest rate on bonds exceeds the interest rate on his checking account.

a) Write an algebraic formula that gives Mr. Midas's demand for money as a fraction of bond and checking account interest rates.

b) Wite an algebraic formula hat gives Mr. Midas's demand for bonds. What is the sum of his demand for money and his demand for bonds?

c) Suppose that all holders of wealth in the economy are identical to Mr. Midas.
Fixed asset supplies per person are $80,000 of bonds and $20,000 of checking acounts. Checking accounts pay no interest. What is the interest rate on bonds in asset market equilibrium?

thanks!

 

[santaslayer]

i have never come across anything like this in the syllabus for my hsc......are u sure ur using the correct textbook?

 

[Bambul]

(a) The two variables are:
x = Money interest rate
y = Bond interest rate

He has $100,000 to invest, of which $50,000 must go to bonds. So take the difference and then substract $5,000 for every percentage point that y is greater than x (ie. y - x) and you get (1).

Demand(money) = (100,000 - 50,000) - 5,000*(y - x) (1)

Simplify to:

Demand(money) = 50,000 - 5,000*(y - x) (2)

(b) He invests $50,000 minimum, plus another $5,000 for each percentage point that y is greater than x (ie. y - x). Put this into an equation and you get (3).

Demand(bonds) = 50,000 + 5000*(y - x) (3)

To get the sum of his demand for money and bonds, just calculate (2) + (3):

Demand(money, bonds) = 50,000 - 5000*(y - x) + 50,000 + 5000*(y - x)
Demand(money, bonds) = (50,000 + 50,000) + 5,000*(y - x) - 5,000*(y - x)
Demand(money, bonds) = 100,000

(c) Now we have a few more values, so lets write them all out:
Demand(bonds) = 80,000
Demand(money) = 20,000
x = 0

Substitute some of them into one of the equations, say (3):

Demand(bonds) = 50,000 + 5000*(y - x)
80,000 = 50,000 + 5,000*(y - 0)
80,000 - 50,000 = 5000*y
30,000 = 5000*y
y = 30,000/5,000
y = 6%

Still confused? I sure hope so!

 

[mouse]

yeah still confused but the answer seems cool though.