3. Money demand: Consider a household that purchases nominal bonds 8:, and real money balances Mt/Pt to maximize E: Z 33 (loath) + 710g(Mt/Pt)) 8:0 subject to the nominal budget constraint: (3) (b) (C) (d) (e) Bt+1 '1' Mt = (1 + 3'03: + Mtl 'l Wt PtCt What is the household optimality condition for bond holding? What is the household optimality condition for money holding? Compare these two conditions, what happens to the demand for real money balances % if the nominal interest rate falls? Explain. What happens to the demand for real money balances if consumption increases? Explain. Now, assume that in equilibrium, nominal expenditures are propor- tional to the nominal money supply: PtCt = (PM; where (I) is a constant. Also, suppose money grows at a constant rate 9M while consumption grows at a constant rate 9\". (If necessary, you may assume that 9M > 96). What is the nominal interest rate? Is it also a constant? Explain