The Demand for Money - Money, which you can use for transactions, pays no interest. There are two types of money: . coins and u - Q med-t you can use for direct payment (via cheq I ,. 'OS). - We refer to the sum of currency and deposits as M] . =- - -=-=. a positive interest rate, i, but they cannot be used for transactions. /,_ . - Term deposits - re equivalent to bondsthey pay interest and cannot be accessed at .~ ~ e. You have $50,000 in wealth. Assume that buying or selling bonds implies some cost, for example, a phone call to a broker and the payment of a transaction fee. How much of your financial wealth should you hold in money, and how much in bonds? The University of Sydney Page Consumption (C) It is reasonable to assume that the relation between consumption and disposable income is linear: C = co + c1YD The relation between consumption and disposable income is charac- terised by two parameters, co and cl. The parameter c1: - is called the propensity to consume. It gives the effect an additional dollar of disposable income has on consumption. If cI is equal to 0.6, then an additional dollar of disposable income increases consumption by $1 X 0.6 = 60 cents. A natural restriction on cl is that it be positive: an increase in dispos- able income is likely to lead to an increase in consumption. - Another natural restriction is that cl part of any increase in disposable I . |y to consume only The University of Sydney Page l7