What happens to the demand for bonds if wealth increases

Reference no: EM13222303

In the financial market model, we are modeling in what form people want to hold their fi- nancial wealth - the value of financial assets minus financial liabilities. Note that wealth is not the same thing as savings or income. For a description of the different meanings, see the Focus box on p.65 of the text.

Recall that people have two choices for what to do with their wealth: money or bonds. Money demand is a function of nominal income and the interest rate. Suppose money demand is given by

Md =PY(.35-i)

aggregate wealth is $50,000 and nominal income is $60,000 per year.

(a) Derive an equation for the demand for bonds Bd.
(b) What happens to the demand for bonds if wealth increases this year? What happens to the demand for money? (Be careful: consider the money demand equation and also think about what determines current consumption in our goods market model.)

Reference no: EM13222303

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