![Q3 (50 points] Suppose that a persons wealth is $100,000 and that her yearly income is $120,000. Also suppose that her money](http://img.homeworklib.com/questions/2ffb4c20-78c4-11ea-a466-a188851f0b2d.png?x-oss-process=image/resize,w_560)
Homework Answers
a. Bd = 50000 - 60000(0.35 - i)
If the interest rate increases by 1 percentage points, bond demand increases by $6000
b. An increase in wealth increases bond demand, but has no effect on money demand, which depends on income (a proxy for transactions demand).
c. An increase in income increases money demand, but decreases bond demand, since we implicitly hold wealth constant.
d. First of all, the use of the term "money" in this statement is not correct. "Income" should be substituted for "money".Second, when people earn more income, their wealth does not change right away. Thus, they increase their demand for money and decrease their demand for bonds.
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