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Question 1: Money demand in an economy is Md/P = 500 + 0.2Y – 1000i.a. (3 marks) You know that P = 100, Y = 1000, and i = 0.10. Find real money demand, nominal money demand, and velocity.b. (3 marks) The price level doubles from P = 100 to P= 200. Find real money demand, nominal money demand, and velocity.c. (3 marks) Starting from the values given in part (a) and assuming that the money demand function as written holds, determine how velocity is affected by an increase in real income, by an increase in the nominal interest rate, and by an increase in the price level.Question 2: Mr. Midas has wealth of $100,000 that he invests entirely in money (a chequing account) and government bonds. He instructs his banker 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 chequing account.a. (2 marks) Write an algebraic formula that gives Mr. Midas’ demand for money as a function of bond and chequing account interest rates.b. (2 marks) Write an algebraic formula that gives Mr. Midas’ demand for bonds. What is the sum of his demand for money and his demand for bonds?c. (2 marks) Suppose that all holders of wealth in the economy are similar to Mr. Midas. Fixed asset supplies per person are $80,000 of bonds and $20,000 of chequing accounts. Chequing accounts now pay no interest. What is the interest rate on bonds in asset market equilibrium?*
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