Question

Mr. Midas has wealth of $100,000 that he invests entirely in money (a checking account) and government bonds. Mr. Midas instructs 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 Checking accounts pay no interest Suppose that all holders of wealth in the economy are identical to Mr. Midas. Fixed asset supplies per person are $50,000 of bonds and $50,000 of checking accounts What is the interest rate on bonds in asset market equilibrium? % (enter your response as a whole number) Hint Remember that in equilibrium, supply of bonds equals demand of bonds and, likewise, supply of money equals demand of money. Each of these equalities provides a way to find the interest rate on bonds. You should be able to find an algebraic formula for Mr. Midas's demand for money or his demand for bonds, depending on how you wish to solve the problem

Answer 1

ANSWER:

Let b = interest on bond

Let c = interest on money

D(money) = 50,000 - 5,000(b - c)

D(bond) = 50,000 + 5,000(b - c)

D(money) = 50,000 and D(bond) = 50,000 and c = 0

50,000 = 50,000 + 5,000(b - 0)

50,0000 - 50,000 = 5,000(b)

0 = 5,000b

b = 0 / 5,000 = 0

so the interest rate on bonds is 0%