Suppose you earn $6,000 per month and spend $200 in each of the month’s 30 days.

Question

Suppose you earn $6,000 per month and spend $200 in each of the month’s 30 days. Compute your average quantity of money demanded if: a. You deposit your entire earnings in your checking account at the beginning of the month. b. You deposit $2,000 into your checking account on the 1st, 11th, and 21st days of the month. c. You deposit $1,000 into your checking account on the 1st, 6th, 11th, 16th, 21st, and 26th days of the month. d. How would you expect the interest rate to affect your decision to opt for strategy (a), (b), or (c)?

Explanation / Answer

Consider the given problem here the person earn “$6,000” per month and spend “$200” in each day of the month.

a).

Now, assume that the person deposit its entire earning , => the person have to withdraw “200” each day, => average money holding is given by, “6,000/2*30 = 100”.

b).

Now, assume that the person deposit “2,000” its checking account on “1st”, “11th”, and “21st” , => the person have to withdraw “200” each of the 10 days, => average money holding is given by, “2,000/2*10 = 100”.

c).

Now, assume that the person deposit “1,000” its checking account on “1st”, “6th”, “11th”, “16th”, “21st” and “26st” , => the person have to withdraw “200” each day of the “5days”, => average money holding is given by, “1,000/2*5 = 100”.

d).

As we know that the interest rate is the cost of holding money, => if the person more of money will forgo the ongoing interest rate, => interest rate is positively related to deposit, => if the “r” increases implied the amount of deposit also increases. So, as the “r” increases implied the average money holding decreases.

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