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(Money Demand) Suppose that you never carry cash. Your paycheck of $1,000 per month is deposited directly into your checking account, and you spend your money at a constant rate so that at the end of each month your checking account balance is zero.
a. What is your average money balance during the pay period?
b. How would each of the following changes affect your average monthly balance?
i. You are paid $500 twice monthly rather than $1,000 each month.
ii. You are uncertain about your total spending each month.
iii. You spend a lot at the beginning of the month (e.g., for rent) and little at the end of the month.
iv. Your monthly income increases.
Use the money market modelto support your argument. Be sure to label the vertical and horizontal axis in your graph.
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Are there other ways to structure a social security system that might alleviate some of the problems associated with this one? Explain.
1. One year ago, you bought a bond for $10,000. You received interest of $400 at the end of the year, as well as your $10,000 principal. If the inflation rate over the last year was five percent, calculate the real return.
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