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Households in an economy has the following money demand function ( M / P ) d = Y if Y < Y and ( M
Households in an economy has the following money demand function ( M / P ) d = Y if Y < Y and ( M / P ) d = ( aY / i ) if Y > = Y where initially i = a . a . Plot the money demand in this economy as a function of output. Suppose there are two types of households in this economy in terms of their income, poor and rich. They have equal share in the total population. Initially, income for poor households is equal to Y < Y and income for the rich households is Y > Y . Answer the rest of the questions according to this information. b . Plot the money demand in this economy as a function of output for both poor and rich households. c . What is the total money demand in this economy? d . Suppose the interest rate doubles. What is the new total money demand in this economy? What does this imply for the velocity of money in this economy? e . Suppose half of the poor households become rich households. What does this imply for the velocity
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