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DJT has $100K to invest in bonds or in money via an interest-earning checking account. DJT instructs his brokers to invest $50K in bonds and to add $5K more in bonds for every percentage point that the interest rate on bonds exceeds that of his checking account.
(a) COMPOSE formula that his DJT's demand for money as a function of the two interest rates.
Demand for money is the quantity of monetary assets people hold in their portfolio. The theory of portfolio allocation implies that the demand for money depends on the expected return.
(b) What is his demand for bonds equation? And the sum of both money and bond demand
(c) Suppose everyone is like the DJT, per fixed assets per person at $80K in bonds and $20K in checking. Checking account now pay no interest. What is the equilibrium interest rate on bonds?
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